What is the difference between profit and cash?
Why do we see profitable businesses run out of cash?
Find out more about this mindset below with Jason!
Profit is your total sales value, less the cost of the stock and other expenses in your business that doesn’t include your drawings. It doesn’t include your debt repayments. It doesn’t include any dividends or repayments to your owners. Profit is only the sales value, less the cost of all the stuff that you’ve used that you’ve had to incur in order to make that sale.
Cash is all cash inflows, less anything going out. It’s also going to include GST. Key consideration there is that profit doesn’t include GST, whereas cash does. So, cash is just the dollars that are coming into your bank and the dollars that are going out.
Even just from that explanation alone, you can see there’s a really big difference between the two of them in real simple terms. You’ll see that for instance:
- GST is not involved in profit at all, but it is clearly cash.
- Loan repayments, are certainly not profit however, they can have a serious impact on your cash but interest on loans will reduce your profit because interest is a business expense.
- Cash spent on assets (like a new car) isn’t going to reduce your profit, but it’s sure as heck going to reduce your cash balance.
- Cash received from the sale of assets, in many cases, is not profit but it does increase your cash balance. Conversely, depreciation will reduce your profit but that’s a non-cash adjustment.
The one main thing to understand in all of this is the impact that things like the examples above have on profit and ultimately tax.
Tax doesn’t reduce your profit, but it will reduce your cash.
So, if you’re a business that’s fully funded by debt and you’ve got sales coming in and not many expenses going out, you’re going to have a lot of profit. However, that’s going to then mean generally, you’re going to have to pay quite a bit of pay tax.
But what if all your money’s gone out to pay loans and interest? You’re going to have no cash left over to pay tax.
This is where a lot of businesses are getting into this horrible downward spiral when we are showing high profits on our P and L but the business is hemorrhaging cash and we’re unable to meet our tax requirements.
Understanding the difference between profit and cash is the first step we need to take when discovering the health and well-being of our business. If you are unsure about how your profit and your cash work and the impacts that all of that can have on your business, please get in touch with us at SMYD Accounting / Advisory. We can help you understand the profit/cash relationship and set you on a path to solving your cashflow issues.
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Ni nini tofauti kati ya faida na fedha? Kwa nini tunaona biashara zenye faida zikiwa na pesa za kutosha? Jifunze zaidi kuhusu mtazamo huu hapa chini pamoja na Jason! Faida ni jumla ya mauzo yako thamani, chini ya gharama ya hisa na gharama nyingine katika biashara yako ambayo haina ni pamoja na michoro yako. Haijumuishi malipo ya madeni yako. Haijumuishi gawio lolote au malipo kwa wamiliki wako. Faida ni thamani ya mauzo tu, chini ya gharama ya vitu vyote ambavyo umetumia ambavyo umelazimika kubeba ili kufanya uuzaji huo. Cash ni fedha zote zinazoingia, chini ya chochote kinachotoka. Pia itajumuisha GST. Fikiria muhimu kuna kwamba faida haina ni pamoja na GST, ambapo fedha hufanya. Cash ni dola ambazo zinaingia benki na dola ambazo zinaondoka. Hata kutoka kwa ufafanuzi huo tu, unaweza kuona kuna tofauti kubwa sana kati ya hizo mbili kwa maneno rahisi. Utaona kwamba kwa mfano: - GST haishiriki katika faida hata kidogo, lakini ni wazi fedha taslimu. Kwa kweli, malipo ya mkopo sio faida, lakini inaweza kuwa na athari kubwa kwa fedha yako, lakini riba ya mkopo itapunguza faida yako kwa sababu riba ni gharama ya biashara. - Fedha alitumia juu ya mali (kama gari mpya) si kwenda kupunguza faida yako, lakini ni uhakika kama heck kwenda kupunguza usawa wako wa fedha. - Cash kupokea kutoka mauzo ya mali, katika kesi nyingi, si faida lakini haina kuongeza usawa wako wa fedha. Kinyume chake, depreciation itapunguza faida yako lakini hiyo ni marekebisho yasiyo ya fedha. Jambo moja muhimu la kuelewa katika yote haya ni athari ambazo mambo kama vile mifano hapo juu yana faida na hatimaye kodi. Kodi haipunguzi faida yako, lakini itapunguza fedha zako. Kwa hiyo, kama wewe ni biashara ambayo ni kikamilifu kufadhiliwa na madeni na una mauzo kuja katika na si gharama nyingi kwenda nje, wewe ni kwenda kuwa na faida nyingi. Hata hivyo, hiyo itamaanisha kwa ujumla, utakuwa na kulipa kiasi kikubwa cha kodi ya mshahara. Lakini vipi ikiwa pesa zako zote zimetumika kulipa mikopo na riba? Huwezi kuwa na fedha za ziada za kulipa kodi. Hii ni ambapo biashara nyingi zinapata katika mzunguko huu wa kutisha wa chini wakati tunaonyesha faida kubwa kwenye P na L yetu lakini biashara ni kutokwa na damu ya fedha na hatuwezi kukidhi mahitaji yetu ya kodi. Kuelewa tofauti kati ya faida na fedha ni hatua ya kwanza tunahitaji kuchukua wakati wa kugundua afya na ustawi wa biashara yetu. Ikiwa una wasiwasi juu ya jinsi faida yako na fedha yako inavyofanya kazi na athari ambazo zote zinaweza kuwa nazo kwenye biashara yako, tafadhali wasiliana nasi katika SMYD Accounting Advisory. Tunaweza kukusaidia kuelewa uhusiano wa faida na fedha na kukuweka kwenye njia ya kutatua masuala yako ya mtiririko wa fedha. Faida dhidi ya Cash Ni nini tofauti kati ya faida na fedha? Kwa nini tunatumia fedha za kawaida, na kwa nini tunahitaji kutumia fedha za kawaida, na kwa nini tunahitaji kutumia fedha za kawaida, na kwa nini tunahitaji kutumia fedha za kawaida, na kwa nini tunahitaji kutumia fedha za kawaida, na kwa nini tunahitaji kutumia fedha za kawaida. Kuanzia kuanza hadi kuwa na uhakika Mzunguko wa Uongozi wa Fedha Mzunguko wa Uongozi wa Fedha - Dhana muhimu sana ya kuelewa katika mazingira ya kiuchumi Je, hata una moja? "Kama ilivyoelezwa hapo juu, ""Mafunzo ya Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwezo wa Uwe."""