The Difference Between Profits and Cash Flows, and Why Each Is Important
We strongly believe there is empowerment in knowing your business numbers. The level of confidence you gain when you can easily navigate growing expenses, decreased sales, or fluctuating seasons is worth the time it takes to become skilled in this area. Business owners who value staying informed in their business activities see that high ROI consistently.
This is why we work so hard to make sure other women-owned businesses feel inspired to follow suit. We want you to know what is possible so you can thrive as you watch your community flourish.
But first – we have to dive into the numbers!
There are two areas we recommend business owners especially learn as they grow empowered in their numbers, profits and cash flow. These areas can help you identify whether your business is financially healthy and able to keep up with the demands of operations.
While both are important they are also different and you should have a working knowledge of how to handle the challenges each can bring.
What is Profit?
Revenue is going to be whatever your business makes. This can be from sales, affiliate income, or other types of revenue-generating activities. Of course, it took some labor, administrative expenses, and materials to help generate that revenue. So once all of those expenses are subtracted from your revenue, we have profit.
Revenue – Expenses = Profit
Profit has plenty of nicknames. Some may call it “the bottom line” or “being in the green / red”. No matter how you identify it, profit is whatever money you have leftover from sales after you have paid all of your expenses.
Profit can be used to reinvest back into your business, you can use it to pay yourself (the owner) a nice little bonus, or you can use it to start a rainy day fund. This money can be a wild card for business owners!
If you follow the Truly Profit Plan, you know how important profit is and we actually recommend making sure profit is considered in your pricing. By including it in your pricing, you aren’t waiting until after expenses are paid to make a profit, but rather planning them into your revenue from the beginning.
What is Cash Flow?
When people hear “cash flow” they may make assumptions like it is how much cash a business has on hand or how much cash a business has leftover. This is not necessarily accurate. Cash flow is best described as the inflows and outflows of cash throughout a business. It is not necessarily a single number but more a handling of how efficient you receive money and appropriate spending of that money.
Cash flow conversations can come up when:
- You have clients / customers that pay late
- You find yourself constantly transferring funds to cover expenses
- You have periods of high and too low cash reserves
Experiencing any of these challenges does not mean your business is in financial trouble. It could mean your business simply needs to restructure some of its processes to better accommodate the flow of income and your bills payment schedule.
For example, let’s say you have monthly clients and they pay on the 10th every month. If most of your bills are due on the 1st of the month, you will want to make sure you have enough funds in your bank account on the upcoming 1st of the month. This may mean being more frugal with your spending from the 10th to the 1st.
For business owners who do not have a budget or use their bank account as a visual aid to determine whether they have enough funds to cover upcoming expenses, this can be a risky way to manage cash flow.
We understand cash flow can be tricky to manage. It requires so much more than checking your bank account to see whether the total balance can cover upcoming expenses.
Profit can be a challenge for business owners as well. It can be difficult figuring out how to price your products or services, then getting your spending just right so you do have some cash left over to invest or save.
While profit and cash flow are different, the resolution to managing both can be easily resolved with the Truly Profit Plan.
Under the Truly Profit Plan we guide you on how to make profit a priority and create savings so cash flow is never an issue. The goal with the Truly Profit Plan is to make managing finances easy for any business owner of any industry.
With the plan you will find your profit becomes more predictable and you always have the appropriate amount of savings to cover your expenses. This plan is flexible so even seasonal businesses can adopt it but also easy – no really!
You will find there is very little math involved in setting up the Truly Profit Plan. Just a bit of addition when it comes to adding up your expenses and multiplication when determining what percentage of your sales you should put into your various budgeted sections.
If you are interested in learning more about the Truly Profit Plan, know we created an affordable course that allows for any business owner to easily set up the Truly Profit Plan in their own business. To learn more, click the button below: