April 18, 2018
Inside: Learn the difference between cash and profit. And discover why the difference can make or break your pharmacy business.
Cash and profit. As a business owner, those are probably two words you love to hear.
They both make your business thrive.
But sometimes you have to choose one over the other.
Every business decision you make affects your cash and profit, from inventory control to the kind of light bulbs you use.
If you don’t know the difference between cash and profit, you won’t know how to grow your pharmacy.
Because one business decision could prioritize the wrong one at the wrong time and turn your pharmacy belly up.
So, here’s what you need to know about the difference between cash and profit. And what the two mean for your business.
Simply put, cash is what you have in the bank.
You can pull cash out anytime and pay with it.
It’s how you purchase inventory. Or, pay your employees. Or, hire someone to fix that leak in the break room for the tenth time.
All of your sales eventually turn into cash.
Simply put, profit is how much money is left over from sales after you’ve paid your expenses.
Gross profit is what’s left after you pay for your cost of goods.
Your gross profit enables you to pay for operating expenses to keep your business running.
Net profit is what’s left after you pay your operating expenses.
Your net profit enables you to reinvest in the business or, say, pay out some big bonuses. This is what’s called “the bottom line.”
Gross Profit = Revenues (Sales) – Cost of Goods Sold (COGS)
Net Profit = Gross Profit – Operating Expenses (SG&A)
Let’s say you earn $100,000 in one month. You pay $60,000 to your wholesaler for products, $20,000 to your employees for labor, and $10,000 for operating expenses.
$100,000 – $60,000 = $40,000
$40,000 – $30,000 = $10,000
After paying for your inventory, you made $40,000 in gross profit.
After paying for your operating expenses, you made $10,000 in net profit.
Gross profit keeps your business running. Net profit keeps your business thriving.
The difference between cash and profit is timing.
Profit becomes cash.
Gross profit transforms into the cash you use to pay to keep your business running.
Net profit becomes the cash you use for anything else you want.
(The rest of cash from sales is revenue).
The more profit you make, the more cash you’ll have. The less profit you make, the less cash you’ll have.
But profit doesn’t immediately convert to cash.
And that’s the rub.
At the point-of-sale, you can calculate your profit. But profit only becomes cash when you get reimbursed—when what you earned actually enters your bank account.
The journey from a sale to cash in your bank (getting paid) to cash out of your bank (making payments) is called cash flow.
You always need to have more cash flowing into your bank than out of your bank.
Profit ensures that overall, you’ll have more cash coming in than out. But cash flow ensures you have cash flowing in at the right time to flow out.
For example, you may have $1,000 coming in and only owe $500 going out. You have more than you need to keep your business running.
But if that $500 is owed at the first of the month and the $1,000 won’t become cash until the end of the month, you can’t pay what you owe.
In other words, you’re in trouble.
You need profit to earn what you owe. You need cash flow to pay what owe.
Now we’re back to the real question.
Although cash vs. profit isn’t typically an either/or question, sometimes it is.
Timing is not just the difference between cash and profit, it’s the tension between cash and profit.
If you need to speed up cash flow to make your payments on time, you may have to sacrifice profit.
For example, you may need to mark down items to sell them faster in order to meet a payment.
The lower price will get you the cash more quickly.
But the lower price will earn you less profit. And less profit ultimately gets you less cash.
So, you’ll get cash in time for your payment. But will you have enough cash for your payment?
For every decision, you have to ask, do I need more cash or do I need cash more quickly?
The sweet spot every pharmacy business owner needs to learn is how to maximize profits while maintaining a positive cash flow.
And now that you know the difference between cash and profit, you can find your business sweet spot.
Knowing the difference between cash and profit can help you make the right business decisions at the right time.
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