Gains, gains, profits! Bankers, business people, and investors are constantly talking about gains. Gains are important to a business, but gains are not as significant as cash.
In this article, we’ll look at gains and the concepts of money, cash flow and net income.
I’ll explain why gains are beaten by cash and how cash flow is more important to your company survival than net income.
What is the Difference between Cash and Profits?
Here’s an easy solution to remember the difference between cash and gain:
Cash is the money into your business checking account. It is when you sell a product or service what your company receives.
Profits are the net amount on a profit and loss statement; the results of sales minus expenses. That’s not exactly the same thing as cash. Think of it this way: Gains are a tax and accounting concept that comes by the end of an accounting period and at tax time. Gains will be caused by a computation; Cash is the result of banking transactions.
What is the Difference between Net Income and Cash Flow?
Cash flow is the cash going into and from your business, during your business checking account.
If it’s negative, it means your company is spending more than it’s collecting.
Net Income is shown on a Net Income statement, however just by the end of a month, quarter, or year.
How Can My Company Have Gains But I Don’t Have Any Cash?
I must bring the theory of accounting methods into this discussion, to answer that question. There are two accounting methods – cash and accrual. An all-cash business uses the cash accounting method. Income is received when cash (check, credit card) changes hands.
What Profits and Cash flow Affect?
Profits combine all business expenses, including depreciation. Depreciation does not take cash out of your company; it is an accounting theory that reduces the value of assets that are depreciable. So depreciation reduces profits, but not cash.
Price and inventory of products sold additionally affect gains, although not necessarily cash. For example, you need to purchase products pay for all those products, and to put into inventory. In the interim, you’re still out the cash, and you may have a gain on the best sale of the merchandise, although that comes out of cash.
Make it a priority to get details about your own monthly cash in and cash out. I work with a Google Sheet, or you could have the ability to talk your accountant into giving you an income worksheet. Include time of income and expenses, and also don’t forget your own wages or attract as the company owner. Obtaining a handle on cash flow can assist you to sleep through the night and be a huge advantage to your organization success.