Profit is simply your business revenue less the expenses incurred. Cash flow is money in versus money out. Therefore they can be different for various reasons:
Revenue is all the business income you have earned based on invoices issued. If the customers haven’t paid you yet then you’ll have lots of income but no cash coming in. So, the higher the amount of your debtors and the longer they take to pay you, the more it effects your business cash flow.
The faster you pay your creditors – the faster you use up your cash.
You may have used your cash to buy lots of stock (assets) but it doesn’t count as an expense until you have sold the stock.
You may have used your cash to buy equipment or a car but you only get to claim depreciation on those purchases over time.
The interest component of any loan repayments you make are expenses but the principal component reduces your loan balance ie your liabilities. Ie the principal component paid reduces your cash flow but not your profit.
Cash flow budgeting is a financial tool that predicts where the money comes from and where the money goes to for the business over a future period (eg the next 12 months). It will highlight any upcoming surpluses or shortages in your cash flow so that you can change things now to ensure that isn’t a problem for you later.
If you would like to know more about how to prepare a cash flow budget or how to manage and improve the cash flow of your business – come in for a chat.