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Profit vs Cash-flow in Hong Kong – Differences Explained

Profitability is different from Cash-flow. To run a successful company in Hong Kong, you need to be familiar with both of these words and the advantages they provide. Learning to distinguish Cash flow from profit can improve your ability to analyze your company’s financial health and identify problems or opportunities early on. Even if your firm is making money, if you don’t have enough cash coming in, you won’t be able to pay your payments. In spite of meeting all debt payments. A firm may not be profitable if its Cash flow is negative. If you want to understand how Cash flow and profit in Hong Kong work and how to handle Cash flow management and profit of your company, this article will guide you through them.

Profit vs Cash-flow in Hong Kong - Differences Explained

Profit and Cash-flow in Hong Kong

Profits and Cash-flows are important aspects of the success of any firm. A company’s long-term viability depends on its ability to both turn a profit and maintain a healthy Cash flow. A company has to be profitable and have a steady flow of cash to function. Both are essential to a company’s long-term health and prosperity. Nonetheless, one may be more important than the other during a certain time frame based on the circumstances. To understand how the balance works, you must first know the importance of Cash flow and profit.

What is Cash-flow in business? 

Cash flow is defined as the net inflow and outflow of cash and other liquid assets over a certain period. Inflows are the money that comes into a company, while outflows are the money that leaves. Sales serve as a company’s primary source of income, while expenses represent the money the company must spend to keep running. Moreover, businesses could earn money via interest, making investments, royalties, and licensing deals. They might even sell goods on credit with the expectation of being paid at a later time.

A simple Cash flow analysis may be done by comparing the number of outstanding purchases to the number of outstanding sales at the conclusion of each month. If your outstanding bills are more than your expected sales for the next month, you may be experiencing Cash-flow issues. A positive Cash flow statement may be an indicator of a successful company with room to expand. Yet the cause of negative Cash-flow is an indicator of whether or not a company is in danger, therefore it warrants more consideration.

Types of Cash-flow 

According to their context of use, Cash flows may be broken down into three broad classes. The periodic balance computed for these liquidity flows is exposed to numerous measurement criteria during Cash-flow analysis. These types of cash flow help to determine the company’s liquidity situation and other financial issues.

  • Operations Cashflow -It indicates an entity’s primary business Cash-flow. In a Cash-flow statement, operational cash inflows and outflows are noted first. The primary source of cash inflow is the revenue earned from product and service sales. Expenditures related to running a business, such as rent, the cost of items supplied, etc., are considered operational outflows.
  • Investing Cashflow – It is a measure of the growth or decline of a company’s long-term assets. Investments in fixed assets, loans made by the company, or projected investment fund profits are all examples of this.
  • Finance Cash-flow – If there is an increase or decrease in long-term loans, liabilities, company capital, or dividends, then an inflow or outflow of cash will be recorded from financing operations. Finance-related Cash-flow examples include capital or interest payments, share repurchases, dividend distributions, new debt, etc.

Example of Cash-flow 

Let’s assume you own a business making toys for children. Consumer spending on toys would generate revenue, while employee salaries would represent expenses. Investments held by the firm may provide cash inflows, while outgoing cash may have to be used to cover things like loan payments, taxes, and operating expenses. The flow of all of these forms of money would be recorded in a Cash-flow statement.

Benefits of maintaining a proper Cash-flow

Effective Cash-flow management goes beyond a steady income. It protects your business’s future. Cash-flow management has further advantages.

  • You can forecast how much money will come into your firm and make sure it’s more than you need by managing your Cash-flow.
  • If you manage your Cash-flow well, you may routinely put aside money to pay your employees on schedule.
  • Cash-flow management lets you forecast account payables. Thus you may buy materials as needed. You may even consider increasing your product line if your Cash-flow is regularly good.
  • Effective Cash-flow management gives you more monetary control. You will control your spending and have enough cash for unforeseen needs.
  • Startup and small company entrepreneurs seek one thing – success. To take advantage of growth prospects, you need a good Cash-flow management strategy.

What is business profit?

Profit is the residual income after expenditures have been deducted. Worker wages, supplies, debt service, and government levies are all part of the expenditures. A company’s owners should see a profit as their reward for taking risks. In smaller businesses, this is often done as a straight wage. Dividends are a common way for firms to distribute profits to their shareholders.

A company’s business profit is the sum remaining after deducting all of its operating costs. All businesses, from the neighbourhood lemonade, stand to the Fortune 500, are in it to make money, hence the measure of success for any enterprise is the amount of money it brings in. Top-line profitability is important to some analysts, while others prefer pre-tax profitability. Others are simply about the money left over after covering costs.

Types of business profit

In business, different forms of profit are used to analyze the functioning of various departments. There are three types of business profits – gross, operational, and net. Analysts may learn more about a company’s success by looking at its many sources of profit and making comparisons to industry peers and previous timeframes.

  • Gross Profit – To calculate gross profit, you take the revenue of your business and deduct the Cost of Goods Sold (COGS) from it. Manufacturing a new product incurs solely the variable expenses of labor, supplies, and energy. Costs associated with maintaining physical assets and personnel are not included. Businesses evaluate their production units to see which brings them the most revenue.
  • Operating Profit – For calculating operational profit, operating expenditures like overhead and other indirect costs, as well as accounting charges like depreciation and amortization, are subtracted from the total amount. It is also known as earnings before interest and taxes (EBIT).
  • Net Profit – Every expense is included in the net profit. It is the most reliable indicator of the company’s financial health. Yet, it might be deceptive. A corporation may seem to be doing well if, for instance, it creates a lot of cash and invests that cash in a rising stock market. Yet, it does not mean the core products are sold at the desired profit.

Example of business profit 

Let us assume ABC Inc. makes a revenue of $200,000 a month. The expense of purchasing goods or COGS is estimated to be $50,000. You can calculate the gross profit by deducting the COGS value from the net revenue. That is $150,000. If there are more expenses coming up, you can deduct them from this value. Let’s assume you have a pending tax payment of $1500. You can determine the net profit value by deducting the expenses. Now, your net profit would be $148,500.

Importance of Cash-flow and business profit

Investors and business owners generally want a single metric to determine company health statistics. They want one financial statement line item to decide whether to invest or change strategy. These situations may urge comparisons between Cash-flow versus profit. Profit and Cash-flow both matter a great deal. To assess a company’s financial health, investors, employees, and entrepreneurs must understand how both measures and interact. You may either pay off debt or boost sales to improve Cash-flow. However, Cash-flow declines without profit. 

If your firm isn’t profitable, you need to boost sales or cut costs to stay afloat. Contrarily, even if your firm is lucrative, it does not give you the license to let things run without your involvement. To stay on track, it is important to monitor your financial flow. Profit and Cash-flow are two of many financial words, measurements, and ratios you should understand to make smart company choices. Understanding important financial concepts may help investors and company owners improve professionally.

How can growth impact Cash-flow?

Although growth is often seen favorably, it may have unintended consequences for your company if it significantly alters its capacity to generate or sustain positive Cash-flow. To this end, it is crucial for every company owner to have a firm grasp of these concepts and how they affect the sustainability of the company’s activities.

You may get into trouble if, during a period of rapid economic expansion, you accepted too many orders before you had the money to start manufacturing them. You can get back on track by borrowing or selling some of your company’s shares, but it’s ideal to avoid these options by knowing when to accelerate or slow down.

Calculation of operating Cash-flow ratio

Cash flow from operations, often known as the operating Cash-flow ratio, is a measure of a company’s ability to pay its bills. It determines whether a company can meet its short-term obligations using money it generates from its primary business. 

To calculate this ratio, one must first determine the Cash-flow generated by the core company activities. The same information is often seen in a company’s Cash-flow statement. In contrast, a company’s present liabilities are readily apparent from the balance sheet. To calculate the operating Cash-flow ratio, use the following formula.

Operating Cash-flow Ratio = Operating cashflow/ total liabilities

To calculate the Cash-flow from operations, use the following formula.

Non-cash expenditures + net income + changes in working capital= Cash-flow from operations.

How to manage the Cash-flow of your business for growth? 

Business plans should always give top priority to Cash flow strategies. If you schedule your deposits and withdrawals in advance, you’ll never have to guess when money will come into or leave your bank account. Knowing when you’ll have enough money on hand to pay your bills is a huge relief. Gaining an understanding of Cash-flow methods will put you ahead of the competition. As you learn the revenue cycles of your customers, vendors, suppliers, and contractors, you’ll be able to estimate Cash-flow. Here are a few tips to manage the flow of your business money for the better.

  • Keep and Maintain Records Properly – You can’t predict how much money will come in or leave out of your company without maintaining accurate financial records.  Having merely a profit and loss report, for instance, is insufficient.  You should constantly be aware of how many billing are pending settlement, how much money has been allocated to critical initiatives, and how soon bills are due. Having this knowledge is crucial for budgeting purposes.
  • Monitor Cash-flow regularly – Borrowing money isn’t necessarily a terrible idea. Sometimes getting a loan is a short-term solution to a problem until your company can stand on its own. But, before taking on any new debt, it’s important to assess your current Cash flow situation thoroughly. If you keep good records, it won’t be difficult to revisit to retrieve the financial data you need for audits and taxes. When profit margins are small, it may be challenging to find the right balance between investing in growth and funding daily operations. In such cases,  keeping an eye on your savings as well as your debt and spending is crucial. 
  • Forecast future Cash-flow – Each company has to deal with its own unique set of difficulties and pressures. Although there is no foolproof way to predict the precise Cash-flow you need on a weekly basis, it is important to estimate the costs involved. This way, you know exactly how much money you’ll have in the bank at the end of each month, regardless of how well your company does financially. An accurate projection of future Cash-flows helps you plan for times when funds may be scarce. Making preparations ahead of time allows your business to weather negative Cash flow with little disruption.

Get Quality Bookkeeping Services in Hong Kong With Startupr!

A perfect Cash-flow not only determines the financial health of your organization but also paves way for more expansion opportunities. But it can take away so much of your time when you juggle between accounting, bookkeeping and developing your core operations – all by yourself.

 This is why a professional service provider like Startupr is crucial for your business. At Startupr, we offer accurate bookkeeping services that are compliant with Hong Kong accounting standards. Our services also include prompt financial statement preparation, accurate monthly reports, and bank reconciliation. Connect with us on a call right away to know more.