Profit vs. Cash Flow – What You Need To Know

Profit is way bigger than just money. 

It means you’re chasing something bigger than you. In the right frame and with the right formula, profit is very powerful.

It’s a matter of having a better understanding of what seems like complicated terms (but they’re actually not!).

The New Profit Formula

Traditionally, profit is viewed as:

Revenue – Expenses = Profit

Basically, what’s left is your profit. 

However, there’s a new way of thinking around profit which is:

Revenue – Profit = Expenses

This means you have to pay yourself first. It’s a tried and true principle if you want your business to grow.

Cash Flow vs. Income Statement

An income statement is a list or summary of income and expenses. 

Cash flow, on the other hand, is about money in and money out. 

The income statement doesn’t always represent how much you have in cash. 

For example, you have $5,000 in sales and you have $2,000 in expenses. So your net income is $3,000. But you also have a debt payment of $1,000 not included in your expenses. Therefore, from a cash standpoint, you have $5,000 – $2,000 – $1,000 = $2,000 in cash.

Owner’s Draw

An owner can take out cash from the business and this only relates to sole proprietors, single-member LLCs, and partnerships. The way you get paid through your business is by taking the owner’s draw, which is basically just money or a check transfer to yourself. A lot of people want to call it payroll. But it’s not payroll. It’s also not tax-deductible and it’s not an expense. 

Vault Account

Once you’re putting the profit back and paying yourself what you should be paid, and you’ve got the tax reserves to pay the bill without shock or worry, then you have to have a vault account that contains your cash reserves to make sure you have the assets. 

If you want to learn more about cash flow vs. income statement, check out 008: Profit vs. Cash Flow – What You Need To Know