Whether you currently believe it to be true or not, cash flow and profit are two very different things, and you need to wrap your head around the differences asap.
If you mistake one for the other at any point, it could be highly detrimental to your business venture, so we want to help you avoid making any silly mistakes.
Healthy cash flow does not necessarily indicate a profitable company, nor does high profitability equal strong cash flow in all instances. We are here to walk you through the differences between the two and explain why they are both so important to any entrepreneur.
What is cash flow?
Cash flow is the very finance that flows into, through, and out of your business venture during a specific period of time. This does not include any lines of credit from suppliers, money owed to you from debtors, or cash in your bank account; it is only concerned with the flow of money inside your business over time.
Your level of cash flow will often be used as an indicator for how healthy your business is in a financial sense. Lenders and investors will check your financial statements, e.g. balance sheets so that they can view how well your organisation is performing.
What is profit?
Profit, which can also be referred to as net income is bound to be one of the most important terms you’ll come across throughout your entire career. Profit simply refers to your total earnings. This can also be called profit, and if your net income rises, it is a positive thing, not only for you, but also for your shareholders and staff members.
You should also be aware of the following:
Gross profit –
Your gross profit is your net sales revenue minus your COGS. You should aim to maintain a high level of gross profit, so that your business venture has more available cash to invest in certain areas or pay off liabilities. If you ever find your gross profit levels to be falling, you should look for cheaper ways to run production, such as using more affordable materials for the creation of your products or services.
Net profit –
This is the profit your business venture makes after all other costs have been deducted, including rent, payroll expenses, taxes, etc. Your net profit is the best indicator you can have on how much cash you are making as an organisation.
Cash flow vs profit
As you can likely already tell, profit and cash flow are very much different things. Profit will show the success of your business on an immediate standing, but cash flow will offer a more balanced analysis of your company’s performance. Profit shows your current financial outlook, whereas cash flow offers a long-term view of your financial performance.
At the point when you consider profit vs cash flow, recollect that it’s totally feasible for your business to be profitable while having bad cash flow. For instance, if you’re a small hardware producer offering discount items to big companies, delayed payment (which isn’t ideal for huge partnerships) could imply that you can’t pay your providers.
Regardless of whether you have a solid product with rising sales figures, you could wind up confronting cash flow issues, and in spite of achieving profit, your business might not be able to meet its monetary commitments.
Is cash flow more important than profit?
For the vast majority of business ventures around the world, making profit will be the ultimate goal. Although, cash flow is the lifeblood of any company, as it measures the financial health of an organisation. This will keep your essential operations ticking over on a daily basis and help you to go on and achieve greater things throughout your business’ lifespan.
You should view both cash flow and profit as largely important pieces of the puzzle, but likely be a little more concerned with the state of your cash flow. Healthy cash flow often means you are turning over decent profit, which is worth thinking about.
Can growth lead to future cash flow issues?
While this may sound strange at first, it is possible for the development of your business to create issues surrounding cash flow. For instance, during a time of high development, a business might acknowledge such a large number of requests without having sufficient money to handle them, making it important to sell stock or look for a business loan.
That is the reason why you must understand cash flow vs profit and – in certain instances – to take your foot off the gas pedal for your organisation’s long-term possibilities. It isn’t always worth rushing in head first, with no idea on how you are going to cover the costs of taking on more work, or hiring extra employees.
Does your cash flow need a boost?
Here at Invoice Funding, we can provide you with a wide range of finance solutions that will help to propel your company forward or simply give it a hand when the going gets tough. Get in touch with a member of our expert team today and discuss what options would be best suited to your business venture.