As a small business, your financial health is vital. Profit and cash flow are essential elements of a thriving business, but they aren’t the same thing. As you grow your business, you’ll need to understand the difference between making and managing money.
Even if you are the best at selling your products or services, you may fall short if you run into cash problems. Here’s what you need to know about profit vs. cash flow for your small business:
What’s the Difference Between Profit vs. Cash Flow?
Profit is defined as your business’ revenue minus its expenses. Another term for this is “net income.” Cash flow is defined as your company’s net inflows and outflows of cash. You have positive cash flow when there is more cash coming in than out and negative cash flow when the opposite is the case.
There’s a common misconception that positive cash flow is the same as profitability. This isn’t necessarily true. A business can have positive cash flow and not be profitable. It can also be profitable and have negative cash flow. You’ll find that timing has a lot to do with these factors.
Which is More Important – Profit or Cash Flow?
Both profitability and cash flow are essential to the long-term health of your business. But, in the short term, one may be more important than the other. For example, if your business has too much cash tied up in receivables or inventory, it may not be able to make payroll whether it is profitable or not. This would make cash flow a priority. But, over time, profitability is essential for any business to survive.
Cash Flow Management is Vital for Small Businesses
If your business has to wait to collect on its receivables instead of collecting payment at the time of sale, there is the potential for cash flow issues. Likewise, businesses that have to heavily invest in inventory can risk running short on the cash required for other things like payroll, maintenance, and expansion.
In some cases, your business may be able to delay cash payment for things like inventory or asset investments. Another way to free up cash flow is to raise additional capital. Finally, your small business can focus on more robust terms for receivables to increase cash collections.
Small Business Accounting Made Simple
While it’s important to understand profit vs. cash flow, there’s no reason for you to be overwhelmed with your small business finances. At Orcutt & Company, we offer small businesses comprehensive accounting services to give you the information you need to make the right decisions for your business.
Through a single provider, you can get the accounting, bookkeeping, payroll, and tax preparation services you need. Contact us today for more information.