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However, most companies do not receive the full payment amount immediately. Once you have made the sale, this $200K HKD is registered as revenue and included on your income statement. While this profit calculation seems simple enough, there are a few areas missing when it comes to understanding the health of your business. Marketing expenses would be considered operating expenses (along with things like rent, equipment purchases, payroll, etc.) are taken out of Gross Profit to get to Net Profit.Ĭongrats! You now have $100K HKD in profit on your income statement. Let’s say you also spent $20K HKD in marketing to achieve this level of revenue. Gross Profit = Revenue – Cost of Goods or Services Provided The first step to calculating profit is to take your total revenue and then subtract the cost of the goods sold. On the other hand, the measurement of profit is more of an accounting concept and while it may be useful on paper (and in audited financial statements), it may not provide the necessary detailed insights into how a company is doing on a day to day basis.įor example, you have a suit business in Hong Kong and last month, you sold $200K HKD in suits and the suits cost you $80K HKD wholesale, your gross profit would be $120K HKD Some common sources of cash flow in come from sales and investments and cash flow out comes from cost of goods, salary and interest payment etc. The simplest method of measuring your cash flow is through your bank account - simply put, your business will have positive cash flow if there is more in the account at the end of the period than when the period began (and vice versa). What is the difference between cash flow and profit?Ĭash flow is a measurement of the actual money coming into and going out of your business. Before we get too ahead of ourselves, let’s first explain the difference between cash flow and profit. Especially If you are a new SME (where cash management is especially challenging), it should be a key area of focus as you get your business up and running.
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Cash flow 101: Why you should worry about cash flow instead of profitĪs a reference, one study found that 82% of businesses fail due to poor cash flow management. However, no matter how creative your business or products are your business may still struggle, and inevitably fail, if you can’t manage your company’s cash flow.
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For small business owners, achieving profitability is often one of the main goals for operating the business.