Local Rosebank Member Andrew Scott, Director UHY Haines Norton shared- As an Accountant I have the unique luxury of being able to look into the window of a client’s business. For various reasons, more often than not, that view is limited to the financial outcomes of a business. While that allows an opportunity to develop an understanding of what drives the business financially, it doesn’t always illustrate the trials and tribulations a client goes through to get there. Nor do those outcomes always support the underlying goals of the business owner.
Last month I was fortunate to attend an event hosted by the Rosebank Business Association in conjunction with the Bank of New Zealand aptly called “It’s a Game Changer.” This was a fun and interactive evening which saw teams pitted against one another to make decisions for a fictional Kiwi small-to-medium sized enterprise, being confronted with a series of real world business challenges.Developed by the BNZ and The Icehouse, the Game Changer is designed to raise people’s business acumen so they can make better quality decisions and figure out what they want to do with their own businesses. Read More Here
The Ice House summed up Revenue is for Vanity, Profit is for Sanity and Cash is Reality! A dangerous mistake is failing to know the difference between profit and cash flow.
Now, profit is the difference between income and expenses; what remains from sales revenue after all the firm’s expenses have been subtracted.Cash flow is the money that flows in and out of the firm’s operations.What does this mean? This implies that it is possible for companies to make a profit, even if the cash flow is negative.
A firm can earn money – and still not be able to pay its bills!
- Thus, it is important to recognise the difference between profit and cash flow. Here, three common examples worth remembering – where cash flow and profit differ:
Profitability is based on how much you have invoiced customers. Cash flow is based on how much they’ve actually paid. Invoiced sums may be paid late – or never.
- A stock of obsolete materials that needs to be written off will affect the profit – negatively. However, it will not impact the cash flow – since the materials were already paid for.
- When paying for new equipment, the cash flowing out equals the entire payment. But, in book-keeping, a cost can be divided over several years, according to the principle of depreciation.
Remember that profit is decided by revenue and costs, as presented in the book-keeping. Cash flow, on the other hand, depends on actual payments to and from the company.
Hope you found this helpful Please share your thoughts and suggestions on what has worked for you in the comments below.