Your business made ₦5 million last month.
You check your bank account and see ₦700,000.
Then you wonder: “Where did the money go?”
This is one of the most common financial misunderstandings among business owners.
Revenue, profit, cash flow and bank balance are related, but they are not the same thing.
Revenue is what you earned
If you sold ₦5 million worth of products or services, your revenue is ₦5 million.
But revenue does not automatically mean you have ₦5 million available to spend.
For example, if customers bought ₦2 million worth of products on credit, you have recorded the sale, but you may not have received the cash yet.
Profit is what remains after expenses
Suppose your business generated ₦5 million in revenue and incurred ₦3.5 million in business expenses.
Your profit is approximately ₦1.5 million before considering the relevant taxes and other adjustments.
But you still may not have ₦1.5 million sitting in the bank.
You could have unpaid customer invoices, outstanding supplier bills, loan repayments or money tied up in inventory.
Cash flow tells you what is actually happening to your cash
Cash flow focuses on money moving into and out of the business.
A profitable business can experience cash-flow problems if customers take too long to pay.
Likewise, a business can have plenty of cash in the bank without being profitable — for example, because it recently received a loan or a large customer deposit.
That is why checking only your bank balance can give you a misleading picture of the health of your business.
What should a business owner monitor?
At minimum, you should know your:
- Revenue: How much did we sell?
- Profit: How much did we actually make after expenses?
- Cash flow: How much cash came in and went out?
- Receivables: How much money do customers still owe us?
- Payables: How much do we owe other people?
Once you track these numbers properly, financial decisions become much easier.
Bookkeeping software such as Clerk by Faxter can help bring this information together. Instead of relying only on your bank balance or scattered spreadsheets, businesses can use organised bookkeeping records to track income, expenses, receivables, payables and overall financial performance.
You stop asking, “Where did all the money go?” and start asking better questions such as, “Why are customers taking 45 days to pay?” or “Which expenses are reducing our margins?”
That is one of the real purposes of bookkeeping: not just recording what happened, but helping you understand what is happening in your business.