Cashflow and profit are two of the most important financial metrics for any business. But while they’re both related to the financial performance of a company, they measure different things.
Knowing the difference – and how cash and profit contribute to your business is key if you want your business to have the best possible financial health.
So let’s break them down, what is the difference between cashflow and profit?
Understanding the technicalities of financial reporting can be daunting as a business owner. And even seasoned business owners can find it hard work resonating with the various financial reports that today’s cloud accounting software can produce.
But getting your head around the differences between cashflow and profit can be a gamechanger – especially when it comes to managing your working capital.
So, let’s look at the differences:
- Profit refers to the amount of money your business has left after subtracting all expenses from your revenue. It’s a measure of your company’s financial success over a given period, whether that’s a month, quarter or a full 12-months.
- Cashflow is a process that measures the inflow and outflow of cash in your business. This includes both your operating and investment activities. Maintaining a ‘positive cashflow position’ is vital for meeting your financial obligations.
Why is it important to make a profit?
Profit is a measure of the financial success of your business. It’s also a key factor in your growth as an organisation. Healthy profits mean you have the surplus cash needed to reinvest in the business, and to pay yourself and your fellow shareholders healthy dividends.
However, you can only make a profit if you have enough liquid cash to keep operating – and this is where the importance of cashflow becomes paramount.
Why is positive cashflow so essential?
Poor cashflow is one of the biggest factors in most business failures. As the lifeblood of the company, cash is an essential ingredient in the financial mix. To operate effectively, you need more cash inflows than cash outflows. If not, you don’t have the cash to purchase raw materials, pay your workforce or buy the services that keep you operating.
Positive cashflow is all about ensuring that there’s more cash coming in than expenses going out. In this harmonious place of being in a ‘positive cashflow position’ you have liquid cash available exactly when you need it – and that’s vital for keeping the lights on in the business.
Profit is an excellent measure of your financial success. But positive cashflow is the electricity that powers your business and keeps the wheels turning day in, day out.
Positive cashflow helps you:
- Stay operational, with enough cash in the kitty
- Meet your financial obligations as a company
- Invest in your expansion, growth and scale-up strategy
- Sustain your long-term success as an ambitious business.
Even a profitable business can face liquidity issues, so getting in control of your cashflow really should be top of your financial to-do list this year.
