What is the difference between cash and profit?
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.
Cash is the money coming into the company from business transactions or can be from investors and it serves as payment for the company’s day to day expenses. Cash is needed for the company’s daily activities, hence the line: “Cash is King”.
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. 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.
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 less 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.
Profit can be compared to food, we can survive without food for a short period of time, but we need to eat in order 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 the majority of small businesses don’t.
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 where 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, your change in cash would be -$3K, leaving you with just a $2K cash balance ($5K starting cash balance – $3K in expenses incurred).
In order 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 as 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.