How different is cash to profits?

:: 00:00

What is the difference between cash and profit? So that's the topic in this week's podcast, episode 65 of I Hate Numbers, where I’m going to explore the difference between cash and profit. I'm going to talk lemonade stands. I'm going to be talking bullies, and I'm going to be talking your friends to help illustrate the distinction between those two items.

:: 00:22

They're very important in a business. It's key to understand what the difference is. And that's what I'm going to be doing in this week's podcast episode. As a heads up, watch out at the end of the show notes. We're not going to be giving you details. Of a webinar session with guides and resources, and it's absolutely free on how to take control of your cashflow using the A B C method.

:: 00:45

More of that towards the end of the podcast. Let's crack on with the show.

:: 00:53

You are listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

:: 01:17

Hi folks. Now do you know what the difference is between cash and profits? Most of us in business will think that businesses only need to make a profit for them to sustain, to last, to grow, and that's absolutely key. That's a long-term aspiration. But even despite making profits, many businesses do not survive.

:: 01:37

Many businesses do not succeed even though they are making profits. Why should that be? Well, let's drill down a little bit further. Now, understandably, we go into business and we need to fix two key goals for ourselves in financial terms, and that is, one is to make a profit, and number two is to make sure we have got good cashflow,

:: 02:00

cashflow that helps us sustain and move the business along. Let's think in terms of what cash actually is. Now cash, as it implies, is the money that we can count in our wallets, the money that we can see in our pockets, and it's the money that flows through our bank accounts. So effectively, cash is the difference between what comes in, what comes out by way of flowing through your bank account.

:: 02:27

It's what you can use to purchase items. It's what you can use to pay yourself to buy new equipment. Now profit on the other hand, is the difference between what you invest in a business revenue minus the expenses, and obviously aspirationally wise, we're always aiming for a positive profit. Now, we talked lemonade stands.

:: 02:46

I certainly mentioned them at the beginning of this podcast. So imagine you start a business and your business is running a lemonade stand. Let's say you shell out a tenner to start that business. You generate sales of 50 quid, you've made yourself a profit of 40 quid. Nice job. Excellent. Let's dig deeper. Let's assume the 10 quid that we had to start our business off.

:: 03:11

We borrowed from a friend of ours. Now our friend is cute, is sharp. And they're saying to us, we'll lend you 10 pounds, but in return we want to get 15 pounds back. So that's five pounds that you owe your friend in terms of interest, as well as owing them the original amount of money itself, which means your original profit of 40 has now dropped down to 35.

:: 03:35

Now being a cute cookie. Making sure that you actually can make that lemonade fast enough to sell. You decide to invest or purchase a juicer. Now, your friend also happens to have a juicer. They're willing to lend to you, and in return for that, they want to have 20 quid for you to use that juicer of theirs. Seems reasonable enough, and you pay them 20 quid for that juicer.

:: 03:59

So now your initial profit at 50 has whittled down to 20 quid for the juicer, 15 quid effectively for the loan and the interest, and you are left now with about 15 quid in your pocket. Now you realise that you've got to actually go out and you've got to buy produce. You've got to buy your cups, your sugar, your lemons to produce the lemonade.

:: 04:23

The problem is, as you're doing this, somebody who's envious of your success, steps in destroys your lemonade stand and you've got no lemonade stand on which to run your business. They also managed to smash your juicer to bits, so you've got now an upset friend with a smashed juicer. You've got a business that's on paper, it's profitable.

:: 04:43

But actually not a great deal of what you can do. Your friend slightly peeved with you, also takes that last five pounds in your pocket and then walks off. So what do you do? You've got a profitable business. You've got absolutely nothing left in the kitty though, which means you go out there and perhaps to borrow that money, you've got to start all over again.

:: 05:02

But what we see is the fundamental reinforcement is that in order to run a business, you need access to cash. Now that bully in your business could be customers who are delaying paying their bills. In the meantime, you still got to pay out to buy stock, to pay freelancers, to pay yourself. Those bullies could be unexpected expenditure arising up that you never realised that you had.

:: 05:27

It could be unexpected price rises, and you need that cash, that hard cash to keep the wheels of your business going. You need that to invest. You need that to pay yourself. You need that to buy products. You need that to buy materials. And it's very feasible that you can run a business in the short term without making profits.

:: 05:49

But as long as you got access to cash, your business, your baby will continue to maintain itself. Okay folks, so what have we learned from here? The two most important goals in a business. Financial goals, things that improve our money attitude, improve our money mindset is knowing and making cash that's sufficient to keep ourselves going, and also to generate profitability for our business.

:: 06:15

In terms of other key metrics that we might have, we're going to meet those in future broadcasts. But the key two ones you need to keep an eye on is the cash in your pocket, the cash in your bank, and the profitability that you make. Hope you found this podcast useful. Remember, before we run off, before we depart, remember check out the notes for the free webinar that's coming up on the 27th of May. For those who register,

:: 06:41

no money is going to change hands, so I don't want any cash off you guys. Register, get the slides, get the recordings, get some resources, and build your own cash story. If you've got some value from this podcast, I'd love it if you could give it a thumbs up, share it with your friends. Apart from that, folks, have a fantastic week and I'll see you on the other side.

:: 07:04

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.