Profit vs. Cash Flow (continued)

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So, cash flow versus profit. Confusing topic – I know. We started talking about it last week, and this week let’s continue.

Hi, I’m Judi Otton with GrowthCast and I’m going to continue, as I just mentioned, talking about cash flow versus profit. There are some things that affect the cash flow in your business that don’t show up on your profit and loss statement. So let’s talk about those things.

The first one is financing. If you borrow money, you get a nice infusion of cash into your business. That affects your cash flow in a very positive way. But also many people are not aware that as you pay back that loan, the principal portion of your payment, you know, your payment is principal and interest, the principle of your payment doesn’t show up on your profit and loss statement. So if you’re paying say a mortgage on a building and it’s many thousands of dollars a month, that’s not going to show up on your profit and loss statement. It shows up on a balance sheet account. So that’s one big difference between profit and cash flow.

The second one is any investing you do. Whether you’re buying or selling securities, stocks, and bonds, or if you’re making any capital expenditures, big equipment, trucks, or real estate, you’re buying a factory or a retail outlet, any improvements to that property, and also inventory. The inventory does not show up on your profit and loss statement until you sell it and then it shows up as the cost of goods.

The final piece that affects your cash flow and doesn’t show up on your P & L. Is any owners’ draws or distributions. If you’re a partnership, an LLC, or a sole proprietor, you’re probably not taking your pay through payroll. You’re just taking what’s called an owner’s draw. If you’re a corporation, you may be taking a paycheck through payroll, but you also may be doing what’s called distributions and those draws and distributions can be significant and not affect your profitability. So keep that in mind. That’s another big difference between cash flow and profit.

I’ll link to last week’s video right here (https://youtu.be/2FIHmgx5UcY) If you want the first part of this series. This is Judi Otton with GrowthCast and I’ll be back next week with a new Fiscal Fitness Tip of the Week.