Cash Flow & Profit Explained

I have realised that people who don’t own business or are in the financial sectors don’t know or care about this two items and its perfectly understandable but how can you not care for what pays your salary, buys your office lunch, coffee, milk ,Stationery, allowances and any other perks you enjoy at work.

Like most guys I also went through this course and I understood it theoretically, or so did I think, up until I started paying salaries and company bills did it come clear what the exact difference. I will try and explain this in a humanly way as possible.

If I was asked to choose who I would want to be in the financial world I would choose Cash flow because he is king, if it were creation God made cash flow then saw how lonely it was then made profit for companionship. Biologically Cash flow is the oxygen, Profits is blood that transports it

Now more relevant example,  In the business world if you sell something  today to -let say Safaricom – worth ksh 1M, and your cost of doing that business was ksh 500K, accounting standards requires you to record it in your books the same day hence at end month your books will be reading a profit of ksh 500. However your books ignore that Safaricom have a 90 days credit policy that is they will pay you after 90 days.

During that month you need to pay expenses, Salaries, Rent, Utility bills and Taxes and what have you. Notice the Taxes? Taxes are very interesting, legally you are supposed to return your income VAT by 20^th of every month, and taxes are paid from profits, so if your books says you made ksh 500k profits you need to pay 16% of 500,000(ksh 80,000) to KRA but remember Safaricom have not paid you that money yet and you already spent an additional 500k providing the service. KRA does not care if you have been paid or not and you will still need money to survive for the next 3 months before the client pays you.

Cash flow is the money you need to survive till the next pay; Profit is the money you make (Sales – cost of sales) during the survival period. Cash flow can come from several places like from an investor, Loan, savings, IPO or profits, but profits can only come from Sales. Cash flow from sales is the most preferred.

But it boiled down to one question, would you rather sell something worth ksh 1,000 with a profit of 800 or sell something worth 2,000 with a profit of 500. Very tricky!

Cash flow > Profits