Profit vs Cash flow

When it comes to running a successful business, profit and cash flow are two very key things that you need. Most people don’t know the difference and how they represent different aspects of a company's financial health. Lets see if I can help explain the differences so you better understand the between profit and cash flow and why they are both important for a thriving business.

What is Profit?

Profit is the amount of money that remains after deducting the business expenses including costs of sale and wages from the gross income. Profit is more often than not the most important factor in running a business and what we are all aiming to achieve.

What is Cash Flow?

Cash flow, on the other hand, is the amount of money that is coming in and going out of your business. It's a measure of how much cash you have on hand at any given time. Cash flow is important because it determines your ability to pay your bills and invest in your business. If you have positive cash flow, it means you have more money coming in than going out. If you have negative cash flow, it means you are spending more money than you are bringing in.

Profit vs Cash Flow: Why are the reports showing I am making a profit but I don’t have that much money in my bank account?

This is the question I get asked the most. How did I make a profit but I have no money in my bank account?
It’s simple, the cash going out is more than what is coming in. Have a look at your bank account, how many transactions are finance repayments or for your streaming services or money you are drawing from your business that is not wages? This is what eats up your cash flow, and those things are not replected on your Profit & Loss reports as they are not an operating expense - keeping in mind finance is a liability, not an expense.

Profit vs Cash Flow: Why Both Are Important

While profit and cash flow are different, they are both important for a thriving business. Here are a few reasons why:

• Profitable businesses can still fail if they don't manage their cash flow. Even if your business is making a profit, if you keep spending your cash on hand to pay for things that are not related to your business or over purchasing stock or have to much outgoing finance repayments, you could still be in trouble. This is why it's important to monitor your cash flow regularly and plan ahead for any cash shortfalls.

• Cash flow can help you make strategic decisions. By understanding your cash flow, you can make informed decisions about when to invest in your business or when to cut costs. For example, if you know you have a cash shortfall coming up, you might decide to delay a big purchase until you have more cash on hand.

• Profit and cash flow can both be indicators of your business's financial health. While profit tells you how much money you are making, cash flow tells you how much money you have on hand to run your business. By looking at both, you can get a more complete picture of your business's financial health.

Managing Profit and Cash Flow

To manage your profit and cash flow effectively, it's important to have a solid financial plan in place. This should include regular monitoring of your income and expenses, as well as forecasting your cash flow needs. Here are a few tips for managing profit and cash flow:

• Keep track of your income and expenses. This will help you identify areas where you can cut costs or increase revenue.

• Forecast your cash flow needs. By looking ahead, you can anticipate any cash shortfalls and plan accordingly.

• Consider financing options. If you need additional cash flow, you might consider financing options like a line of credit or a small business loan.

• Review your financial plan regularly. Your business is constantly changing, so it's important to review your financial plan regularly and make adjustments as needed.

Profit and cash flow are both important metrics for a thriving business. While profit tells you how efficiently your business is operating, cash flow tells you how much cash you have on hand to run your business. By understanding both metrics and managing them effectively, you can ensure the financial health of your business for years to come.