When looking at accounts the two main financial metrics that are talked about most are profit and cashflow, but what are the differences?
While both are important metrics to keep an eye on, and both are related to the performance of your company, they track very different things and knowing the difference is the first step to making use of them.
Understanding the technicalities of both reports can be a daunting task for anyone, especially a new business owner. Luckily understanding the basics of both reports isn’t overly complicated, the first step is to understand what each report shows.
A profit report, or profit and loss report, shows the total income and expenses for a set period which in turn then shows the profit or loss (or money left over). It’s a great measure of the financial success of your business over a set period. However, this report is based on the sales and purchase invoices and doesn’t take into account any money still owed or owing. Essential it shows the profit or loss on paper and not the real-world cash movements.
This is where the cashflow comes in, a cashflow report shows the actual cash movement in your business for a given period. It does this by measuring the inflow and outflow of cash in your business and takes into account all movements, including any investments activities. It is very important to maintain a positive cashflow as this is the measure of the money readily available in your business.
It is important to make use of both reports in conjunction. Making sure your business is making a healthy profit is important for growth and paying out dividends to shareholders. However, you can’t reinvest in the business or pay out dividends if your company has no liquid cash, which is where the cashflow comes in and what makes it so important and vital for maintaining a positive outlook.
If you’d like more information on either report, help understanding and making use of them or having them prepared for you please get in touch with us.
