Surely, making a profit means you’re generating cash? That’s what I used to think. Ever looked at a business’s profit and thought, “They’re smashing it!”—only to find out they’re not sure if they’ll have enough to pay the employees at the end of the month? That’s because cash and profit aren’t the same thing. Mixing them up is like thinking you can run a marathon just because you bought new trainers. The difference is:
Cash:
Cash is the actual money sitting in your bank account, ready to pay for salaries, suppliers, rent, and that suspiciously high coffee bill. Cash flow is all about timing—when money comes in and when it goes out. Positive cash flow means you’re bringing in more than you’re spending, keeping the business ticking over smoothly. Run out of cash, and it’s game over—no matter how great your profits look on paper.
Profit:
Profit is what’s left after you subtract all your expenses from your revenue. It’s the number that makes your accountant smile—or grimace. There are three types to know:
- Gross Profit: Revenue minus the cost of goods sold. Tells you if your products are actually making money.
- Operating Profit: Gross profit minus operating expenses. This shows how efficiently you’re running the day-to-day.
- Net Profit: What’s left after all expenses, interest, and taxes. The final scorecard for your business.
You can show a healthy profit but still be cash-poor if customers are slow to pay or if your money’s tied up in unsold inventory. Likewise, you might have loads of cash but no profit if your expenses are out of control.
Cash is about survival—keeping the lights on. Profit is about success—showing how well your business is actually performing. To grow and thrive, you need to manage both!
