Does Cash Flow Mean Profit?

To manage your business effectively, you must understand the difference between making money and managing money. While some may think cash flow and profit are the same, they are very different. And both are critical to your future success.

What’s the difference between profit and cash flow?
A business can be profitable with poor cash flow, while a healthy cash flow doesn’t necessarily mean your business is thriving. Let’s start by defining each:

• • Profit (also known as net income) is your revenue after you subtract costs. Gross profit refers to what your business makes after you deduct direct costs. Net profit is what you make after you deduct all other costs.
  • Cash flow refers to how money flows into and out of your business throughout a given period of time—positive cash flow means there’s money coming into your business and negative cash flow means money is going out.

So which is more critical to your business—profit or cash flow?
Profit will show you the immediate success of your business, but cash flow may be more crucial to your company’s long-term plans. Profit is typically an indicator of financial health; however, cash flow is what keeps your daily operations moving forward. The critical difference between the two is timing. Consider these examples:

If you own a small consulting firm, you may likely collect your receivables on a 30-day or 60-day payment cycle. That means you’ll show a profit on your books, but the cash will not be available until you receive payment. So if you need to purchase something or pay vendors, you may find yourself with low cash flow. Unfortunately, you may have to put off a business opportunity or delay purchasing something you need—or be unable to meet your day-to-day obligations. And at the end of the day, you may not survive if you cannot maintain a positive cash flow.

On the other hand, if you own a local deli, you probably receive payments immediately at point-of-sale terminals through debit cards, credit cards, and cash purchases. In that instance, you will have cash flow immediately; however, you may have to sell much more than the small consulting firm to make a profit each day. And if you can’t regularly show a profit, it can negatively impact your ability to grow.

The importance of generating a positive cash flow.
A positive cash flow is necessary to generate profits. So it’s critical to take a closer look at a few ways to create positive cash flow, especially if you want your business to grow and thrive:

• • Tighten up your receivables window – and if you have customers who don’t pay on time, consider charging late fees or asking for upfront payment for specific products or services you offer.
  • Find ways to attract new business – not necessarily adding new customers, but focusing on increasing business with your existing customer base (as it’s much cheaper to do so). For example, consider offering a promotional special or a VIP program to existing customers to drive repeat business and potentially an influx of cash.
  • Get a short-term business loan – there are many available, including our business loans at Pinnacle Bank. Be sure to look for a loan that will help you meet your immediate cash flow needs without causing you to land in too much debt in the long run.

Next step: Discover more ways to optimize your cash flow.

Get the help you need.

Managing a business is challenging—there are many things to do on any given day. But it’s vital to look at how cash flow impacts your bottom line consistently. If you need assistance finding ways to maximize your profitability or improve your cash flow position, we can help you. Contact one of our business experts at 877.759.7939