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!
In addition, cash flow and a lack of financial management are listed as one of the top 5 reasons consultants go out of business.
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.
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.
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.