Accounting terms provide a clear and concise way of understanding both personal and business finance. Terms such as gross cash and net cash are useful to help you understand the impact of expenses, taxes and other variables that affect your financial plan. You should understand the differences between the two prior to making even a simple budget.
Gross Cash
Gross cash represents all receipts acquired in business. It may also represent the total amount of income you make in your job. The latter is also referred to as “gross income.” However, gross cash may also refer to investment income in addition to income from wages, salary or business sales receipts. Regardless of the source, gross cash refers to the total amount of money that goes to you.
Net Cash
Net cash is the amount of gross cash that remains after all deductions are taken. These deductions may include taxes, expenses in a business, retirement savings deductions, health insurance deductions from your paycheck or any other expenses deducted from your paycheck.
Significance
Net cash represents disposable income or income left to pay other expenses you have. Net cash may also be used to invest or kept as savings. Businesses use net cash as a way to effectively measure the cost of doing business. Whether net cash represents profitability depends on the nature of the business. A business that has low net cash but reinvests most of its revenues could be expecting future profits or may be expanding existing business. The business technically may be profitable, though net cash would not necessarily reflect profitability during a temporary expansion effort.
Effect
Net cash can have many meanings, depending on the context. In personal finance, higher net cash is associated with greater financial stability. In business, it may or may not reflect stability, depending on what the business is doing with excess capital. In general, for both business and personal finance, decreasing costs associated with taxes and ordinary business expenses increases financial stability, because less money is going toward simply running the business or maintaining a personal lifestyle, and more disposable income is set aside for savings, investment or business expansion.