Cash Flow v Net Profit

Over the next Several Weeks we will be posting a new and different one-minute video providing business tips and instructional commentary for small business owners.   These tips will range from key metrics to consider to the importance of Business and Cash Flow Forecasting.

Net Profit and Cash are not one in the same.  Many business owners don’t understand why.

My name is Michael Barbarita from Next Step CFO providing outsourced CFO Services with your know your numbers minute.

Cash is derived by taking net profit which you are likely familiar with and adjusting it for non-cash expenses like depreciation and amortization and then changes in all of the balance sheet accounts.  And by changes, I mean the differences from one accounting period to another.  For example, let’s say Accounts Receivable went from $10,000 last period to $30,000 this period that is a cash depletion of $20,000. Because the increase in Accounts Receivable represents cash that did not come in. Another Example is if Accounts Payable went from $10,000 to $20,000 That represents a cash increase of $10,000 because that is money we kept and did not pay vendors.

A business owner who runs their business purely on cash flow will likely make bad business decisions.  A business owner who runs their business purely on net profit will also likely make bad business decisions.  It is the CEO who understands and manages their business by understanding both cash flow and net profit who will maximize both profitability and cash flow.

Remember, the most successful business owners know their numbers.

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