Cash is vital when you’re running a business. However, cash and profits aren’t the same and profits are actually the lifeblood of a business, whether it’s a bricks-and-mortar retail outlet or an e-commerce enterprise, or any other type of business. Today, we’d like to empower you as an entrepreneur by sharing information about the difference between cash and profits.
Sometimes, companies go under because their money is locked up in their assets. This means that company staff members aren’t able to pay bills, such as invoices from suppliers.
Working capital must be available in order to keep a business healthy. So, profits may be tied up in assets. Cash is needed to pay monthly operating expenses. This is just one example of how cash and profits differ. With this in mind, a smart entrepreneur will learn to manage cash flow, in addition to thinking about profits.
How to Calculate Cash Flow
You need money that you can access in order to keep your business running. This means keeping track of cash flow and making projections about future cash flow. For example, do you tend to sell things and then get paid by clients after the fact, such as thirty or sixty days later? If so, this may strongly impact your cash flow. You need to keep cash in reserve, as customers don’t always pay right away. You still need to pay your bills even when your customers wait to pay theirs!
Cash flow may differ from profits, sometimes radically. Entrepreneurs who assume that cash and profits are the same may put themselves and their businesses at risk.
A business may be profitable but impoverished in terms of working capital.
Do You Have Enough Cash?
If you can’t quickly convert your assets, which you probably purchased with profits, into ready cash (working capital), you need to put together a kitty which includes more than enough cash for operating expenses and unforeseen expenses. If you don’t have enough working capital, problems may arise and you may need to take out loans in order to keep going, even though your company does make money.
Look At Monthly Operating Costs
If you’re having trouble socking away enough working capital, we recommend looking at your monthly operating expenses. Seek out solutions which will help you to trim your operating expenses. For example, you may want to review contracts with suppliers and see if you can get terms which are more favorable. Most suppliers are willing to negotiate rather than losing your business to competitors.
As well, look at the cost of credit. Could you negotiate a lower interest rate on anything, from a company credit card to a line of credit? It’s usually possible to do so and you can save a lot of money. What you save from improving supplier contracts and lowering interest rates for credit may be put into a Working Capital account, which helps you to save for the proverbial rainy day.
Now that you know the different between cash and profits, you’ll be ready to move forward and ensure that you have enough cash for operating expenses and emergency expenses.
About the Author
Morris Edwards is a content writer at CompanyRegistrationinSingapore.com.sg, he writes different topics likeTop Habits Of Successful Entrepreneurs and6 Tips for Business Success for Entrepreneurs and all topics related to Business, Marketing and Singapore Company Setup.