Part 4 – Keeping Score: Profit Distributions
One of the most commonly misunderstood concepts in business is, “Why is my profit position different than my cash position?” Profit and cash flow are both essential elements of a business, but they are not the same thing. To manage your business, you must understand the difference between making money and managing money.
How Profit and Cash Flow Are Different
Profit is revenue less expenses; it is also referred to as net income. Cash flow, on the other hand, refers to a business’s inflows and outflows of cash. Earning revenue does not always increase cash immediately, and incurring an expense does not always decrease cash immediately.
One item that creates the difference between profits and cash flow is Profit Distributions. When a company makes cash distributions to distribute the profits back to the business owner(s), it’s to keep track of how much profits have been distributed, and how many are left to distribute. The distributions distribute the cash generated from our profits. Therefore reducing cash but not our profit position.
An owner must also remember the quarterly estimated payments and payment of any tax owed on the profits throughout the year.
Below is a brief illustration to demonstrate just one of the many reasons why cash position and profit position are not the same.
For more information on cash and tax impact of distribution see one of the following articles:
Estimated Tax Payments; Do I Need to Make Them, When and How?
