What is the Difference Between Net Profit and Cash Flow?
April 1st, 2023
Every business aspires to have robust cash flow and a great net profit – but these are two separate things. The difference between cash flow and net profit can say a lot about the financial health of an organization.
In this quick lesson on business finance, we’ll cover:
- What is the Difference Between Net Profit and Cash Flow?
- How to Determine Net Profit
- How to Determine Cash Flow
- How to Increase Cash Flow & Net Profits
- How Banks Benefit Small Businesses
Use this information to boost your financial acumen and help grow your business.
What is the Difference Between Net Profit and Cash Flow?
Cash flow is the total amount of money that comes in and out of your business during a given period of time. This includes all income, purchases, collections and interest.
Profit is whatever balance remains from your revenue after costs are deducted for a given time period.
In order for a business to grow successfully in the long term, it is typically necessary to generate both positive cash flow and profits. The best businesses use all resources available to them in order to sharpen the margins of both cash flow and profit. Over long periods of time, these gains can compound and take a business to new heights.
How to Determine Net Profit
Before you can figure out the difference between your net profit and your cash flow, you need to be able to define each.
In order to determine net profit, you deduct all company expenses from its total revenue.
An example of net profit would be:
- Your business sells $10,000 worth of products
- It cost you $4,000 to make the products
- Your operating expenses including labor cost $2,000
- Your taxes on those products and labor is $3,000
- Your net profit is $1,000, or 10%
This is a simple explanation of net profit, but hopefully one that gets you thinking about which numbers are important to focus on for your organization.
How to Determine Net Cash Flow
Net cash flow is a relatively simple formula to follow:
- Choose a period of time
- Take all cash inflows and subtract all cash outflows during that time
For example, if you were trying to determine your net cash flow from January, you would take however much money came into your business’s bank account and subtract all expenditures.
Net cash flow can often be a good barometer of your business financial health, but it can also be misleading if you don’t understand the nature of your inflow and outflows. For example, if you are taking on lots of debt to create short term cash inflow, then your financial snapshot might look different than another business which is creating the same proceeds without incurring new debt.
This is why it is important to have a strong financial team to help your business thrive.
How to Increase Cash Flow and Net Profits
While there is no one-size-fits-all solution for increasing the cash flow or net profits of a business, there are some things that business owners may overlook if they are having top-line financial issues.
In order to bring more money into your business, it is recommended to consider:
- Improving your inventory or purchasing based on data
- Accepting more forms of payments from customers
- Invoicing immediately
- Charging interest on unpaid invoices
- Finding the best prices from your suppliers
- Increasing your pricing
- Using a high-yield savings account for your business
These are just a few ways you can improve the numbers if you are looking to make your business bank account grow.
How Banks Benefit Small Businesses
When looking for a strong local bank for your business to work with, you should consider a lot more than just hanging on to your money.
The best banks for businesses offer:
- Lines of credit
- Cash management services
- High-yield business savings accounts
- Dedicated business bankers
- A variety of business-friendly financing options, including SBA loans
Community banks can benefit local businesses by having accessible resources and bankers who will take their time to communicate and offer solutions that may have dramatic positive impact on your business. There are few things more frustrating than working with a large corporate bank with policies that cannot be changed without jumping through many hoops.
Community West Bank is the Best Bank for Your Small Business
At Community West Bank, we work with our customers’ best interests in mind. As a local bank, many of our clients are small businesses, so our financing and cash management products and our staff are available to help you maximize the profits and cash flow for your organization.
If you are looking to bank with a team of experienced professionals who will help to give you an opportunity to grow your business successfully, please reach out today. We’re here to help.