The first post in our 8 mistakes accountants make series is all about how profits dont always mean cash flow.
First let us define three key terms: profits, revenue, and cash.
Profits: Profits is an accounting concept that depends on a lot of imposed timing constraints for sales, costs, and expenses.
Revenue: Revenue is money coming into the business. For most accounting and financial analysis purposes, it’s the same as sales. But technically, revenue can also include sales of assets and money coming in as loans and investments.
Cash: Cash, on the other hand, is what it takes to pay your bills—the actual money you have in hand.
Now that we know all the definitions, it is time to understand when and how to use profits, revenue, and cash. For the most part, people think in terms of profits instead of cash. This is fine until you think that you have more cash than you do. Cash and profits don’t always match, that is why looking at cash flow is so vital.
Sometimes a business can look profitable on paper but be cash bankrupt. If you have no cash to operate your business, profits may not matter if the difference is too great between the two of them. When you hear the term, “the bottom line” think of cash instead of profits. This will help save your business and make your life a lot easier.
To read more about this topic, check out this awesome article: https://articles.bplans.com/difference-between-cash-and-profits/