Cash Flow VS Profit

Many young and immature entrepreneurs fail. The failures mostly occur at the start up and early running phase. There are a lot of reasons why the failures occur. One of the main reasons why young entrepreneurs fail is because they mistakenly associate cash flow with profit.

Cash Flow is not a profit! I repeat cash flow is not a profit! Cash flow is the indicator of where your money flows over a period of time. The cash that is left is not a profit, it is just cash you have at that time. The cash is the blood of the business. If the cash is used, then the business will not be able to maintain its daily operations as there will be no money left over for future expenses. For this reason, its important that an entrepreneur have an understanding of cash flow and how to read their financial statements to see how it fits into the health of their business.

Profit is cash that you can use or distribute to the business's shareholders. Profit comes from "clean" cash after deducting all the costs that should have been use in the business. For example if a t-shirt costs $5/ piece and you sell it at $8 then your profit is $3 ( you can't use the $5 because its used to for the materials and expenses related to making the t-shirt). If the difference between your cost and profit is small, it's easy to understand why an etreprenuer would be tempted to use the money. However, when millions of dollars are involved the temptation to use the money is also great. Many entrepreneurs suffer from debt because they use $4 instead of $3.

Its better for an entrepreneur to start small that way they can learn the difference between cash flow and profit with minimal risk.

So remember cash flow is not profit! Don't use the money if you don't understand the difference between the two.

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