Cash vs Profit – Key Difference Between Cash and Profit
What is the main relationship between cash and profit in accounting? Simply put, cash and profit are two different things? Knowing the difference between cash and profit is an asset. A few business men do not know the difference between cash and profit.
In a clearer form, let us liken cash to the air we breathe in and profit to the food we eat. Without air, we cannot survive, but without food for a few days we can still be alive. The point? A company or business organization needs cash always apparently for survival. But the same company can be fine at least for some time without profit?
In another way, if a company would have to survive, they cannot do away with cash, but this organization will still survive if they do not make profits at least for a period of time. Granted, both profit and cash are consequential if a company would want to develop. Interestingly, both cash and profit have their place and an entrepreneur must know this.
Understanding the difference between cash and profit in operations will help a business know where focus will be driven out too. Also, having a clear cut understanding about the cash flow, will help the company to draw their success rate.
Another important reason why it is to vital to know the difference between cash and profit is that it gives the company or business a deeper understanding on the business activities and how the decisions by managements affects the company’s profit and how sustainable they will become in the near future.
This article will analyze quality points to note in understanding the difference between cash and profit. This article will be of tremendous help to already established business and prospective entrepreneurs.
What is Cash?
Are you running an already established business? If so, then, the initial startup cost for establishing, all the money needed to set up the business is your cash.
Are you thinking of establishing a new business? If that is your case, then the money you’ve set aside, the one you will be offered by investors is your cash.
In any business, cash is always the king! Either you are already in a business, or you are thinking of creating one, it is important that you know how much cash you will be creating. If a company would want to survive, the key is on the manner at which the cash is being managed.
One good point to note about cash is that, in the long run, if an operation in the company is well profitable, it will give rise to stable source of cash for the business.
What is Profit?
Profit happens when the revenue generated exceeds the expenses incurred. Also called “net income”. Profit is the money gained outside the cash spent for purchasing, buying or operation cost of goods and services. For better calcification, let’s play in some figures.
Money Invested = $45,000
Money Generate= $75,000 (Over a period of one month)
You would note that there is an excess of $30,000. That is your profit and not the whole $75,000. This excess, will serve as a resources for you to invest in future operations.
The success of a business will be tied in with the amount of profit made during the cost of operation. Profits in a company tends to either fall or rise based on the tax paid.
Banks who gives out loans also are interested to know the profit a business owner is making since it will not only give you opportunity to birth new businesses but will also help you run a business in a responsible way.
Why You Must Know the Difference Between Cash and Profit
When you make profit, you might be tempted to give thought on expansion. But you really need to exercise great caution. Why? In a bit to expand, there will be many cash going in for the expansion. Including hiring more workers, buying more equipment.
If care is not exercised, all cash might go in before realizing new money since you will be merging all the profit with the initial cash set up. How wise will it be to think on the cost of expansion before going in.
Most skilled entrepreneur sits down to calculate the expenses. They will never put all their profit into expanding their business, because they know quite well that expanding excessively give rise to potential danger.
They also recognize the fact that much money will be pumped into the expansion, thereby they consider it wise to do it gradual even though the profit made will not be much. And when they are ready to make expansions, they would have thought well on a strategic plan they have on ground, their budget and a forecast on their cash flow. Thus showing that they know the difference between cash and profit.
In a business, both cash and profit are needed for an effective operation. Yet there is a difference between cash and profit. Cash is not profit, profit is not cash. Cash is the life blood of a business and must always be available, hence the business will collapse. Enough cash on ground will make it easier for future expansion.