Small business owners always ask me the difference between CASH and PROFIT. If you are confused as well, this article will help you!
Cash and profit are different. Cash is not profit, and profit is not cash. Knowing the difference between cash and profit is very important in business especially if you want to become a Finance Savvy CEO®. So …
What is Cash?
Cash is the money coming into your business from your business transactions or investors. It serves as a payment for your company’s day-to-day expenses. Cash is needed for your company’s daily activities, hence the line: “Cash is Queen”.
- Daily Expenses: Rent, utilities, salaries, etc.
- Immediate Needs: Paying suppliers and managing day-to-day activities.
- Survival: “Cash is Queen” because, without it, your business can’t function.
A company can be tagged as surviving if the cash is just enough to meet the expenses. If the cash you have on hand is less than the amount of expenses you owe, then you’re either going to need to borrow to cover the cash shortfall or risk fines and litigation.
Consider cash as the gas in your car. Without enough gas, you can’t keep driving, no matter how new or fancy your car (business) is. A positive cash flow means your business can handle its financial obligations and avoid borrowing or facing fines.
Cash plays a major important role in the business for in order for the business to expand, a higher cash flow is required. Cash flow should always be greater than the total cost of the company’s expenses.
What is Profit?
Profit is simply the amount of money you have left after you’ve paid for all of your expenses. It can be defined as revenue minus all the company’s expenses in a certain period. Profit is a major factor for a business to succeed. Without profit, a business can strive and survive for a time, but eventually, it will be hard to continue without being profitable over the long term as being profitable is what helps your business to grow and scale effectively.
- Calculation: Revenue minus all expenses.
- Growth Indicator: Profit indicates your business’s ability to grow and scale.
- Survival: Like food for our bodies, profit is essential for long-term growth.
Profit can be compared to food, we can survive without food for a short time, but we need to eat for us to survive. Without food, we all die of hunger. The same goes with profit, without it, the company would likely close down, eventually unless it has an abundance (or unlimited) supply of cash that it can keep putting into the business, which most small businesses don’t.
Real-Life Example
See, you can turn a profit in your business but still run out of cash – let’s say for example you currently have $5K in cash in the bank to start your company and then you close a big $10K deal. You start delivering on the work so you record the $10K in revenue but you also have to come out of pocket $3K in expenses during this time when you’re delivering on the work. Well, in this scenario you would show that you have $7K in profits for the period($10K revenue – $3K expenses), but if this client hasn’t paid your invoice for the work done, while your profits would be $7 on paper, your change in cash would be -$3K, leaving you with just a $2K cash balance ($5K starting cash balance – $3K in expenses incurred).
Why Both Cash and Profit Matter
For the business to succeed, the company needs both cash and profit. Companies should not only focus on profit but on having a strong grasp of cash flow as well.
Profitability makes the business grow and expand. Cash serves as the company’s oxygen; it serves as the day-to-day driving force to sustain a business.
To sum it up, cash is different from profit. Both are needed for the company to survive, long term. Cash and profit are considered the air and food of the company. Without them, it will be challenging to survive in the long run. So, pay attention to both cash flow and profit, but always remember, cash is QUEEN, and profit is your business’s lifeline.