Have you ever been caught off-guard when your accountant told you that you have made a profit and had to pay tax, whilst your bank account echoed like an empty chamber? Rest assured, you’re not the only one.
So, let’s look at the difference between profit and cashflow. I realize that since Covid and lockdowns became the new normal, profits and cashflow may be grouped with unicorns and the pot of gold at the end of the rainbow; but hey, I remain an optimist.
The difference between Profit and Cashflow
|The amount left over after expenses paid||Cash in and out of business|
|More indicative of business success||More important for day-to-day operations|
|Accounting concept||Reflects what is happening in the bank account|
What can impact our cashflow?
- Awaiting refunds from SARS – VAT and Tax refunds
- Tax payments due to SARS
- Customer payments due to us
- Money tied up in stock
- The timing between purchasing raw material, invoicing and receiving payment
10 Solutions to Cashflow challenges
- Budget for future big-ticket expenses
- Create provision funds for specific expenses – VAT, TAX, Bonus, Emergency
- Don’t operate too close to the fence
- Don’t strip all cash and profit from the business
- Set aside taxes to be paid
- Clear stock at lower prices to free up cashflow
- Offer discount for early payment
- Credit check before extending credit
- Send out invoices immediately, and follow up on payments
- Outsource certain business functions if full-time resources are not required.