The ultimate goal of every business is to be successful or profitable. It is often challenging for a business owner to guide their business to success can be quite challenging. Along with focusing on their day-to-day operations, they should be up to date with the financial health of the business. It is important to understand various financial aspects that affect their business.
Cash vs. Profit
Cash and profit are two major metrics to scale the financial health of a business. Business owners depend on their financial statements like profit and loss statements and cash flow statements to understand their numbers. Both profit and cash flow are having their significance in evaluating the financial health of the business.
Cash simply refers to the actual money a business available to your business to meet its costs and expenses. Whereas Profit is the amount after deducting all the expenses of a business from its revenue. Both cash and revenue are connected, having proper knowledge about both are vital while making business decisions or planning new strategies.
A business can be profitable and have a cash shortage at the same time. Even though the business is generating profit on paper, it might struggle to meet its day-to-day expenses, paying suppliers and employees. This makes it hard for the business to grow and expand. Apart from the profit and loss statement, you should also focus on the balance sheet and cash flow to understand the true financial position of a business.
Chasing profit blindly by overlooking the cash is simply a no-go. If you don’t convert profit into cash, the whole process is pointless. You need cash for your everyday operations, The profit in the books won’t serve a purpose unless it is converted to cash. They are often stuck in receivables, inventory, equipment, and so on. Profit in the bank is always greater than profit in books.
Insufficient funds can create numerous challenges. You will lose the credit benefits extended by your suppliers. Losing their trust can cost you in the long run. If you don’t pay your employees on time, you will have a steep decline in employee morale. In essence, the overall business productivity will go down along with sales. You might end up liquidating your assets or inventory faster to meet ends. This will ultimately decrease your anticipated profit.
A detailed cash flow forecast can get you a better understanding of your payables and receivables. Implementing the right strategies to drive more sales will improve the profitability of the business. You can also take measures to follow up and collect the receivables to generate a positive cash flow. Depending on your financial needs you need to keep revising your plans to achieve your long-term and short-term objectives. Proper positive cash flow forecasting needs to be done to manage your receivables efficiently. Your business will run out of cash anyway with an unprofitable cash flow.
Giving discounts on early payments encourages your customers to pay up before the due date mentioned in the invoice. This helps you avoid the cash getting stuck in the receivables. Maintaining an emergency fund is always a great idea to face unexpected cash crunches. Having some backup cash will help you avoid making other painful decisions like selling your inventory for an unreasonable low price, or getting loans at high-interest rates.
What is more important? Cash or Profit?
To understand what is more important (Cash or profit), you will have to look from multiple perspectives. You need to address both the short-term and long-term needs of your business. If you don’t focus on profit from a long-term perspective, your business will keep running out of cash over and over again. Also, you need to have enough working capital to run your business smoothly. If you can’t generate enough cash for your working capital at an instance and you have liabilities to sort out, you can get into a rough spot. You might even go bankrupt. Hence focusing on cash is necessary from a short-term perspective.
Both cash and profit are interrelated and significant in their own ways. If you’re looking for an instant solution, you should always need a positive cash flow and a well-devised strategy to enable growth and be profitable.
Do you face trouble managing cash in your business? Do you find it challenging to understand your numbers? We’re here to help you out. Contact us now!