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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:
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:
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
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