How can a company make a profit and still have no cash?
90% of the entrepreneurs are absolutely wrong about cash vs profit. Confused the two can lead to financial issues. Learn how to distinguish the two, and what to do about it. Let’s tune in!
Today’s topic – Profit v.s Cash
What is profit
[00:27] 90% of entrepreneurs use cash and profit interchangeably. We can see profit as a matter of an opinion. In accounting, we take revenue and do our best to match up the associated expense to see if we make profit or not.
What is cash
[00:39] On the other hand, cash is tangible. For example, a hundred dollar that you can hold in your hand and use it to buy things.
An easy way to distinguish cash and profit
Here’s a trick to distinguish cash and profit: Cash take into account of timing
For example: If I buy a camera for $50, I have to literally give someone $50. Now, I am -50 profit wise, and -50 cash wise. And then, I sell my camera for $100 to Victor, but he will pay me until the next month (30 days). On paper, I will have +50 net profit, but in reality, I am still -50 cash.
What are the consequences to confuse cash and profit
For businesses that are not careful or can’t distinguish the issue, they tend to run into the issues. For example, I might have the business that a lot of money comes in, but I don’t really turn profits. I sell 100,000 cameras for $100 for each and sell them for $100/each. Then, I’m actually not making any profits.
I’m running an extremely profitable business. For each camera I sell, I earn $30 net profit. However, the clients only pay me for 3 months, 6 months, or 9 months. It gets you to trouble because you’ll run out of cash before you receive the payment.
Here’s a quick tip to fix this problem: The best way to collect your payments on time is don’t have the receivables. Always get paid before spend the first dollar out.
Hope you find it helpful, share your thoughts with us or ping us see if we can help.