Why Profit and Cash Flow Are Two Very Different Things

Posted on: 7 February 2019

If you're relatively new to the world of business but believe that you have a solid idea to bring to the market place, you may have done quite a lot of research to ensure that your product or service will actually sell. Along the way, you may have worked out how much it will cost to generate your saleable commodity and be fairly sure how much you can charge when everything is ready. Yet while this should give you some confidence to go forward, this is only part of the battle when it comes to creating a successful business. If you haven't yet looked at your potential cash flow, calculated your breakeven point and talked with your bank, then you could be setting yourself up for trouble. Why is this so important?

The Mysteries of Cash Flow

If you've done a profit and loss projection for the year, then you may show a healthy profit when everything has been taken into account. However, you have to get from here to there and during that time, you will undoubtedly face some ups and downs when it comes to your actual cash flow. In other words, you need to be sure that you have enough money in your bank whenever any set costs become due and payable.

This is a major hurdle for some new business owners, who simply fail to plan accordingly and find that they run out of money. Certainly, they may get the funds to cover all that expenditure at some stage in the near future, but unless they have a prearranged agreement with a bank or other financier, they will be in hot water.

Calculating Breakeven Point

Remember, when you start a new operation, you will undoubtedly face some initial setup costs. Therefore, you may have to have an overdraft or other facility in place so that you can keep trading while you pay off the initial "bubble" costs. This is why it's important to calculate your breakeven point, so you know when your business is trading profitably after taking into account all start-up, variable and set costs.

Calling in the Expert

If you are a typically creative business owner, you may hate the thought of dealing with mundane matters like bookkeeping or accounting. This is why you should engage a professional to help you, so you can foresee any cash flow difficulties and put in place any solutions necessary to overcome.