When you look at your net income versus cash flow, why are they different? If net income is the money that you bring in, and cash flow is the cash you have on hand, aren’t they the same thing?
Nope. And that’s one of the things that trips up many small business owners. And this isn’t just semantics. The difference really matters. Have you ever looked at your income statement and seen that it reads at $15,000 for the month, but your bank account shows you have less cash than that? That’s because net income and cash flow mean different things, and shouldn’t be used interchangeably, or you’ll get a misleading picture of your business.
Here’s what net income and cash flow both mean, and why that’s important to you.
For starters, net income is the profit that your small business earned over a period of time. Specifically, net income is your revenues minus the expenses you incurred to earn those revenues. The word revenue is key here. In accounting, you only record revenue when you’ve earned it (when you’ve done the work)—not when it’s received (when someone actually pays you).
Whereas your cash flow is the money you actually have on hand—what people have actually paid you that you deposit into your bank account.
For many small businesses, just looking at net income and not cash flow can be misleading. You might have earned $60,000 in revenue last month. But if your customers don’t pay you for a few months, your cash flow will be lower.
Things get even more complicated if you, like many small businesses, get paid on terms (for example, if you receive a deposit for work you haven’t completed). For a good explanation, read this short article. For example, if you are paying back loans, that will affect cash but not the income statement.
So keep this in mind when you’re looking at revenue versus cash flow!
Questions? Chat with one of our friendly franchise experts today: Call us at 720-213-8040 or click below to request a free consultation.