Editorial

Cash Flow or Profit – Which is More Important for Your Business?

In difficult economic times, it is more important than ever for business leaders to engage more directly with their business’ financial situation. But if you’re relatively new to running a business, you may be struggling for which metrics to track and manage more keenly. Which is more important for you to monitor: cash flow, or profit?

What is Cash Flow?

Cash flow, simply put, describes the ‘flow’ of money in and out of your business. It is a simple balance of money earned against money spent, and an unavoidably important part of following your business’ finances on a day-to-day basis.

As an example, in a given day your business might receive payments for goods and services from your clients. On that same day, your business might pay an outstanding invoice to a supplier or manufacturer. If the cash flowing in from your clients is greater than the cash flowing outto your supplier, your business has experienced positive cashflow – and in the inverse case, negative cashflow.

What is Profit?

Profit, meanwhile, refers to the total value of the difference between revenue and expenses; it is the money ‘made’ on a product or service. There are three distinct kinds of profit: net, gross, and operating profit. Here we will expound on each.

Gross profit is the amount of money your business makes on its products in a given period of time, calculated by deducting expenses incurred in the production or provision of the product from its retail value.Operating profit takes into account the comprehensive costs of running your business before tax. Net profit is the amount your business makes after all costs and taxes are taken into consideration.

Which is More Important?

Profit and cash flow are often mistakenly lumped together as equivalent calculations, but actually perform very different functions to one another. Profit figures are a good way to evaluate the overall health of a business’ strategy, but cash flow can be much more telling when it comes to a business’ standing and trajectory.

Which figure is more important than the other often differs from business to business, and from situation to situation; financial consultants are invaluable for helping businesses decode their numbers, and figure out which is more important to their individual needs here. But, by and large, cash flow is the more important signifier of business solvency – and perhaps the most important for any business to manage in the short term.

Why Cash Flow is Crucial

Cash flow is particularly important to monitor as it can be much more telling about your assets and debt burdens than profit figures. Your profits may be increasing in a promising manner, but if you have significant debts to pay off then much of that additional profit will be poured into paying off said debt – resulting in stagnant or even negative cash flow despite positive performance, and telegraphing your financial situation to potential business partners, investors and other lenders.

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