Many consultants mistake cash and profit as the same.
However, I am here to tell you that they are NOT the same.
As a virtual CFO for consultants, I see many firm owners mistaking cash for-profit and vice versa can lead your consulting company into financial trouble.
Today, I will explain the difference between the two and help you determine which one is really king!
Shocking statistics about cash and profit
- 80% of businesses fail because they run out of cash.
- And only 40% of businesses are profitable.
In addition, cash flow and a lack of financial management are listed as one of the top 5 reasons consultants go out of business.
WOW! Let's deep dive into this even more. Did you know that you can be profitable on paper but have no money in the bank? Yess!!!
So, picture this...
You review your income statement for May. And at the very bottom, you actually generated a Net Profit! Yes?
That is something to celebrate, right.
The next thing you do is log into your bank account, expecting to see that amount as your bank balance. But, low and behold, it's not there?
As a matter of fact, the amount in the bank account is much lower than the Net Income on your Profit & Loss Statement.
At this time, you're thinking, "What is going on?"
LOL... well, allow me to enlighten you.
What Is Cash Flow?
Cash flow is the flow of money in and out of your business. Cash can flow in and out of your business in several different ways.
For example, cash can flow in via loans, grants, revenue, owner's contributions, and more.
Cash can flow out via expenses, credit card payments, loan payments, owner's distributions, and more.
You can have a positive or negative cash flow. And in just a second, I'm going to show you how.
For now, a positive cash flow means that your company consistently has more cash enter than the cash going out.
On the flip side, a negative cash flow means more money is leaving your business than entering. You do not want to operate in this way.
As a consulting firm owner, you want to make sure you have a positive cash flow at all times.
Now, let's deep dive into profit.
What Is Profit?
Profit is the financial gain or loss between the amount of revenue earned and expenses incurred during a period.
If you earn more money than you spend, this will result in a Net Income or Net Profit.
If you spend more money than you earn, this will result in a Net Loss.
The Difference Between Cash Flow vs. Profit
First, you can earn money for completing a consulting project, but if your client never pays the invoice, that means no cash enters your bank account.
Therefore you earned revenue, in which your profit and loss statement may show a Net Income, but your cash will not change because they never paid the invoice.
Likewise, for expenses, you can owe for the expenses but never pay them.
Therefore even though you owe them money, it never leaves your bank account.
Entrepreneurial consultants and small business owners make the biggest mistake in laser focusing on their income statement but not their firm's cash position.
Unfortunately, the income state only identifies your revenue and expenses.
It does not provide you with insight into your company's superpower - which is your cash flow.
You see, a firm can be profitable on paper but have little to no money in the bank. I call this Paper Profit.
So, instead of just reviewing your Profit & Loss Statement, you should also consistently review your cash flow statement as a consulting firm owner.
We provide key metrics for our clients to track in our Virtual CFO Services for Consultants™ that position them to increase both their cash flow and profits consistently.
Now, are you clear between cash flow vs. profit?
Your key takeaway here is:
Profit is how you keep score in business.
Cash is your business's superpower.
Without enough cash, your business can not operate.
The significant difference between the two is - timing in which the money is received or leaves your business.
Today, I provided you with the difference between cash flow vs. profit.
If you are a 6-figure consultant or service-based business and you are ready to say yes to a profitable million-dollar firm, contact us today at sayyestoprofits.com
This is Octavia! Until next time – SYTP!