Cash Flow vs Profit – What’s More Important?
Cash flow and profit are both important financial systems in business, and it is not uncommon to occasionally confuse the two terms. But cash flow and profit are not the same thing and it is critical to understand the difference between them to make key decisions regarding a business’s performance and financial health.
What is Cash Flow?
In its simplest form cash flow is the inflow and outflow of money from a business which is necessary for daily operations such as taxes, purchasing inventory, and paying employees and operating costs. A positive cash flow will allow a company to settle debts, reinvest in its business, return money to shareholders, and pay expenses. Whereas a negative cashflow will indicate that a company’s assets are decreasing.
What is Profit?
Profit also known as Net Income is the amount of earnings that exceeds expenses for the period. Where a business has made a profit, that business will be charged Corporation Tax on this amount. There are three major types of profit that analysts analyse: gross profit, operating profit, and net profit. Each type of profit gives the analyst more information about the company’s performance, especially when compared against other time periods and industry competitors. All three levels of profitability can be found on the income statement.
Which Is More Important to A Business?
One thing to acknowledge when determining whether to focus on cash flow or profit is that cash flow can be bought in some ways. One of them being that a business owner can get a small business loan from a bank to keep the business running until it starts seeing cash flow again. It is important to understand that a business may see profit every month but this profit may be tied up in hard assets or accounts receivables and therefore there is no actual cash to pay employees or fund any daily operations. In this instance, cash flow is more important because it keeps the business running while maintaining profit. With that being said, the absence of a profit eventually has a declining effect on the cash flow. In this instance, profit is more important. Therefore, when determining which one is more important, it depends on the business and the circumstances.
At outsourced ACC our cloud based software gives you access to real time cashflow information. Bank balances, Receivables & Payables. Advance features can also project cashflows with different base models. We work close using third part cashflow management.
Written by Tricia Carr