Let’s dive deeper into why cash flow and profit can show different numbers.
Consider a business with a net profit of just $419 for the year. On the balance sheet, however, the company may show $61,000 in cash. How is this possible? Here are the main reasons:
- Carryover from Previous Years: Profits from prior years may not have been used, so they remain in cash. Even if the current year’s profit is small, the cash balance can be much higher.
- Loans: Taking out a business loan increases cash but doesn’t count as profit. So, cash can rise even if profit stays low.
- Owner Distributions or Investments: Cash can be used for personal withdrawals, dividends, or new investments, which affects available cash but not profit.
This is why lenders often examine both profit and cash flow. Profit shows if your company is earning, while cash flow shows whether your business can sustain operations, pay debts, and invest in growth.
Key takeaway: Profit and cash flow measure different things, and both are critical to assess the financial health of your business.
If you’re unsure about your numbers or want a professional review, contact my firm at info@akifcpa.com.