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Are you confused about the difference between cash flow and profit? If so you’re not alone.
Hi, this is Judi Otton with GrowthCast and I referred to these two concepts in an earlier video and got some questions so I thought I’d dive in.
First, let’s start with some definitions. Cash flow is the money, the actual cash, coming into and going out of your business. Profit is what’s left after you deduct your expenses from your revenue.
So why do those two things differ? Well, the first big reason is timing. For most businesses when you send an invoice, you’ll recognize the revenue from that sale. But from a cash perspective, you don’t get the cash until the customer pays. And if you’re like many of the businesses that I work with that have let their accounts receivable run a little long, that can be 30 or 60 or even more days. On the expense side, when you enter a bill into your accounting system, the expense is recognized. But from a cash flow perspective, it doesn’t affect your cash until you actually pay the bill actually, until the check actually clears. You know, you pay the bill, you may put it in the mail if you’re still writing checks, and not until that check actually clears, does it have an effect on cash flow.
Now there is this thing called a Cash Basis Profit and Loss Statement that will look very similar to the cash except that it’s missing all the other items that affect cash flow that doesn’t affect your profitability and we’ll talk about those next week.
So stay tuned. Subscribe to my Youtube channel. The link is here (https://www.youtube.com/channel/UCaJ1oJF0qk3peqoZ8Rk4g5w) so that you can hear about the rest of the difference between cash flow and profit. This is Judi Otton with GrowthCast. I’ll be back next week with your Fiscal Fitness Tip of the Week.