Many businesses find it difficult to differentiate between cash, cashflow and profit. In this article we examine some of the key distinctions.
Cash is the liquid assets of the business, i.e. funds immediately available such as coins and notes, bank balances and overdraft facilities and therefore does not include money held on long term deposit or money owed by patients.
Cashflow is the cash movements into and out of the practice.
From an accounts perspective, profit is income less expenses. Whilst this may sound similar to cashflow, there are normally several non-cash accounting adjustments in the profit and loss account. These include:
In addition to the above, there are some cash movements which are not reflected in the profit and loss account. Examples include:
- Purchase of fixed assets such as computers, dental equipment, office furniture or a car (see example above).
- The proceeds from the sale of an asset such as a car.
- The receipt of a bank loan or an increased bank overdraft.
- The repayment of the capital element of a loan or hire purchase agreement. Remember it is only the interest element which is deducted against accounting profit.
- For sole traders and partnerships, drawings to pay personal living costs, tax and National Insurance liabilities or pension contributions.
Given all of the above differences, it is possible to make a profit and still have a negative cashflow. Managing the practice’s cashflow is therefore very important and this will be the subject of next quarter’s article.