Small Business Guide: Is Cash Flow Different From Profit?

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StrategyDriven Managing Your Finances Article |Cash flow|Small Business Guide: Is Cash Flow Different From Profit?Both cash flow and profit are essential to all businesses, regardless of size. Even though most people use them synonymously, they are entirely different entities. Business owners need to understand the difference between both metrics to optimize their business’s financial health and performance.

Before investors invest money into a startup, they study the company’s cash flow and profit to determine if it is a sound long-term investment or a place they can make passive income in the short term. These metrics also guide business owners when they make critical business decisions.

What Is Cash Flow?

Cash flow is the movement of cash in and out of a business at any time. For a business to operate optimally, it needs to spend money. These expenses usually include running costs, taxes, inventory purchases, employee wages, rent, office lease payments, loan repayments, and so on. Businesses are built to make money, so cash is expected to come in if the company runs as expected.

When a business receives more money than it spends, that is positive cash flow. If it spends more than it receives, that is negative cash flow. Cash flow management is needed for small businesses to survive. If not, they will spend their way into bankruptcy. There are three types of cash flow;

1. Operating Cash Flow

This is the net cash inflow from everyday business activities. This metric should stay positive to keep a small business growing.

2. Investing Cash Flow

This is the net cash flow generated from a business’s investment activities. This usually includes property investments, vehicle purchases, asset sales, and stock market investments. Cash outflow should be positive for a small business that actively invests revenue back into the business.

3. Financing Cash Flow

This is the cash flow between a business, its creditors, investors, and owners. It is used to offset debts, pay royalties, and dividends.


What Is Profit?

Profit is the cash that remains after a business has deducted its expenses from its total revenue. The profits of a small business are usually given to the business owner and shareholders or put back into the company. A business’s tax is calculated based on its profits, not revenue.

Similar to cash flow, profits can either be positive or negative. If negative, the company is losing money by spending more overall than they make. If positive, then it is making more than it spends. There are three types of profits:

1. Gross Profit

This is the profit a business realizes after deducting the cost of producing the goods sold to generate its revenue.

2. Operating Profit

This is the profit a business gets from its regular operations. Money spent on tax, loan repayments, rent, and income from areas outside the core business is not accounted for here.

3. Net Profit

This is all the profit realized after all the expenses have been subtracted from all the income.

Endnote

Cash flow is different from profit because cash flow does not give a clear picture of the overall financial health of a business. However, it is necessary to provide cash that would be spent on day-to-day operations, wages, and so on. On the other hand, profit is the primary goal of a business. It is not always represented by cash.

An increase in asset and property value also counts as profit. It is hard to say which of the two is more important because every business has different circumstances. Regardless, small businesses must maintain healthy cash flow to keep them running and ensure they make a profit to stay operational long-term.

Choosing the Right Bank

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StrategyDriven Managing Your Finances Article | Choosing the Right BankChoosing the right bank to help manage your finances can be difficult. With so many local and national bank chains, the options from which to choose can be seemingly endless. However, with just a few simple steps, you can be much closer to choosing the right bank for you.

Step 1: Decide What Account Type(s) You Need

The first thing you should decide is what type of accounts you need. Perhaps you simply need a checking account for depositing your paychecks or a savings account to start building your emergency fund. If this is the case, then you can be sure almost any bank you choose will meet your needs.

However, if you are looking for more advanced options such as credit card lines, personal loans and wealth management, you will find your pool of options begins to get smaller.

Step 2: Find Banks Local to You 

While online banking largely eliminates the need to regularly visit the bank in person, it may still be important to visit the bank directly on certain occasions, and depending on where you are located, certain chains may be more or less available. For example, if located in Massachusetts, Kevin Cohee OneUnited Bank could be a great option, but if you are in North Carolina, Well’s Fargo may be more readily accessible.

It is important to note that it is possible to maintain accounts without a local branch, so if you do not care to have a face-to-face option, then finding local banks may not be a priority for you.


Step 3: Consider the Benefits

Depending on the accounts you choose to open, you may enjoy any number of complimentary benefits. Two of the most popular benefits to look for in choosing a bank are access to a mobile app and not having to pay an annual fee.

Large chains such as PNC or Kevin Cohee OneUnited Bank will offer instant access to all your banking needs, but smaller, local banks may not. In addition, many banks may charge an annual fee to bank with them or may charge a fee for low balances or over-drafting your account. Look for banks that take measures to help you avoid these fees with features such as offering free, customizable account alerts.

At the end of the day, there is no perfect bank, and there is not just one bank that will work for you. So consider these steps to help you make an informed decision, but know that you can always change banks if you find the bank you initially choose ends up not being right for you.

Cost-Effective Tips For Buying A Company Vehicle

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StrategyDriven Managing Your Finances Article |Buying a company vehicle|Cost-Effective Tips For Buying A Company VehiclePurchasing a company vehicle can be very beneficial for your business. With a company car, you can easily make it to appointments and meetings or offer convenient services such as delivery. You can also gain access to various tax benefits. However, purchasing assets for your business can be challenging. Additionally, with 29% of businesses failing due to a lack of capital or cash flow, you must look for the best cost-effective methods to help you buy a car for your business, especially if you’re expanding your small business. So, which cost-effective methods can you employ to help you buy a company car for your business? If that’s a question you’re trying to answer, you’re at the right place! Here are some tips to help you.

1. Consider getting the vehicle on lease

One of the first options you would have to consider is whether it would be better to lease or own a business car. Should you decide to buy a car for your small business, you might need to take out a loan, which you would have to pay later. The disadvantage with loans is that you will still pay back even if the value of your vehicle falls below the amount loaned to you.

With leasing, however, the remaining value at the end of the lease can lower the final cost of the lease. Leasing has become a more popular choice for many small businesses because of its excellent benefits. It helps improve your cash flow, especially since outrightly buying a car can take a substantial hit to your cash flow. It’s also a smarter way to avoid spending money on a depreciating asset, and you can reclaim any costs through corporation tax.


2. Consider purchasing a used vehicle

For many small businesses, especially those in the early growth stages, buying a new car is not the best financial choice. If your business prioritizes function over form, purchasing a used car can help you avoid any upfront costs and depreciation.

However, this doesn’t mean you have to choose a used car immediately over a new one. There are some risks associated with purchasing used cars. Some vehicles might not be in good shape and may only last a year or two before breaking down completely. Therefore, be sure a credible mechanic inspects your preferred used vehicle before purchase. This is to identify any issues and evaluate if buying the used car would be a smart financial move. You can also consider purchasing your used car from a private seller instead of a used car dealer, which can help you negotiate better and save more money.

3. Check its fuel consumption rate

Besides the cost of your vehicle, another thing you must strongly consider is the fuel costs. You will need to refuel your car regularly; otherwise, it will not be able to fully serve its intended purpose. Although you may be unable to avoid fuel prices, purchasing a fuel-efficient car can help you stay on budget. You can also consider purchasing small business fuel cards, which are extremely cost-effective and provide a wide range of services.

4. Consider maintenance and insurance costs

Your expenses don’t stop once you buy a vehicle for your small business. Whether used or new, your business’s car will need yearly maintenance checks to ensure that it’s functioning properly. Annual maintenance checks are extremely useful as you can identify, prevent, and fix any potential major car issues before it gets worse.

It would be best to prepare for insurance costs, as every car should have one. Insurance will save you from major expenses, especially when your vehicle is involved in an accident, stolen, or damaged by weather. Check out the various business vehicle policies that insurance companies have to help make the best choice.

5. Buy a vehicle that fits its purpose

When purchasing a car for your business, you must ensure it is designed to fit its purpose. If you were hauling heavy tools and equipment to different work sites, it would be better to get a pickup truck that can haul heavy materials conveniently. Before you begin your car search, list why you need the vehicle and what features you are looking for. It will narrow your search and make the entire experience less stressful.

Finding the best company car that is affordable is not an entirely easy process, given the wide range of options. But with the right plan and budget, you can find the most cost-effective vehicle that will serve your business best.

4 Important Factors in Choosing a Revenue-Based Financing Lender

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StrategyDriven Managing Your Finances Article | 4 Important Factors in Choosing a Revenue-Based Financing LenderWhen it comes to revenue-based financing, it’s important to do your research. Not all lenders are created equal, and you need to make sure you partner with a reputable company that has your best interests at heart.

Partner mentality, competitive terms, history of investing, and dependable and timely funding are the things you should consider when choosing a lender. Read on to learn more.

Partner Mentality

Once you start a company, you’re going to run into a number of people offering you money — but not all of these people will be able to offer you the support and guidance needed to truly grow. When you’re choosing investors, you don’t want someone who just hands you money and then leaves — you want someone who will act as an active partner in your business.

There are revenue based financing firms that would be more than glad to partner with you to help grow your business. They’re committed to helping you throughout the entire duration of your loan, even after the term sheet has been signed and the transaction has been completed.

Competitive Terms

First-time business owners can run into lenders who want to hand them a term sheet that was drawn up without the borrower’s consultation. While this may seem like an easy and quick way to get money, these deals usually end up having less-than-ideal results for you.

You should only work with an RBF lender who will work with you to come up with the best terms possible for every party involved. Your needs and the lender’s needs should be accounted for, and a good lender will draft a term sheet that reflects this.

History of Investing

As more SaaS companies are established, RBF increasingly becomes more popular. This means you have more lenders to choose from — both good and bad.

Low-quality lenders can quickly ruin your company, so it’s important to do research on a lender before accepting a deal. Check a lender’s portfolio and contact their previous clients to see what their experience was like. If no red flags appear, you can move forward more confidently.

Dependable and Timely Funding

Managing a business is hard enough without factoring in an unreliable vendor. When you mix in chasing down an investor for the capital they promised, it gets even harder.

While it may sound absurd, this is a situation some founders deal with — which is why it’s important to partner with a reliable lender. Choose a firm that has a strong and positive reputation as well as a track record of providing funding without any complex approval processes and delays.

Choosing the Right Partner for Lasting Growth

As an organization that’s heavily dependent on funding, it’s crucial to have the right lender supporting you — not just financially, but holistically. By doing your due diligence and avoiding accepting deals prematurely, you can ensure you partner with a lender who can act as an investor and a mentor during an important phase in your company’s growth.