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Competitive Edge Blog

  • alison28006

Your Business's Real Revenue

Do you know how much money your business is really making? Do you understand the difference between Profit and Cash Flow?

All small business owners need to develop a clear picture and understanding of their business’s financial health, this is where understanding the difference between cash flow and profit can allow you to build a stronger foundation in your business to expedite your future success.

So first thing - a business's profitability (that is the bottom line revenue less your expenses) is only one part of having a successful business. The 2nd part is understanding where the cash actually goes, this is understanding the cash flow.

A business can be profitable on paper and have positive cash flow -

The easiest example of recent times is the CEBA loan. One of the main qualifiers for this loan was having payroll in your business of 20K or more. There were no requirements to have a reduced revenue, or to be shut down due to local health restrictions etc. So some small businesses got 60 thousand dollars from CEBA, and both revenues and profit stayed consistent. But cash flow increased when they got the loan.

A business can be profitable on paper but have negative cash flow -

that is using more cash than it is taking in from its revenue. For example when your business purchases a new vehicle. You take say 25 thousand dollars from the business bank account to purchase a new business vehicle, the cash flow is negative but the profit is hardly impacted.

A business can also not be profitable or losing money on paper, so its expenses are more than its revenue coming in. but have positive cash flow

- a good example of this is when the owners of the business are using personal funds to cover business expenses. Cash flow is positive because the owners are injecting money into the business to cover business expenses, the cash is not coming from the business.

and finally a business can be “losing” money on paper, that is not profitable and have a negative cash flow, this is very common during the start-up phase of a business - an example is when your clients are late paying you and you therefore are using credit to cover your start-up expenses. So your start-up expenses are high causing your business to be losing money and your incoming cash flow is negative because your clients are later in paying you.

Understanding how your profit is calculated and where your money ultimately goes is one of the things that will help you get ahead faster. Let’s get your business set up on the right track this year!

Until next time...

Christine Walters

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