Weighing The Importance Of Cash Flow Vs Profit
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Many business owners understand the importance of making a profit, but what about the significance of cash flow? Both cash flow and profit are essential to incorporate into your review procedures to improve your business’s financial health and make more informed business decisions. The difference between cash flow and profit and which scenarios each is used for will help you properly discern the two.
What Is Cash Flow?
Cash flow analyses the money you are generating and spending. Money going out of your bank accounts is referred to as an outflow while the money being deposited is an inflow. Timing the movement of money is key to avoiding bouncing payments and planning for upcoming purchases. Generally, you want your cash flow to be positive, meaning you are bringing in more than you are spending. However, if your cash flow goes negative, it may be time to re-evaluate your cash flow management policies and procedures.
What Is Profit?
Profit is the income you are generating from your product or service sales after all expenses are taken out. This number is frequently referred to as net income and is found at the bottom of the income statement. Expenses subtracted from your revenue include cost of goods sold, occupancy expenses, selling expenses, and general expenses. Many small business owners focus on profit because the goal is to be generating income to support their lifestyle; however, only focusing on profit leads to poor business financial health.
Which One Is More Important?
Short answer: neither. Both profit and cash flow provide insight into different areas of your business. Cash flow should be used for new businesses as you may have more money flowing out than in. As a result, you may have difficulty paying employees, suppliers, and other third parties. Focusing on cash flow can effectively time the purchase of the supplies and equipment to get your business up and running without running out of cash.
On the other hand, profit is a critical component for seasonal businesses and those looking to expand into new markets. Seasonal businesses won’t have a steady cash flow all year, meaning they need to focus on generating high levels of profit to sustain their lifestyle and operations during the months when money isn’t being generated. Moreover, growth relies on having profit to reinvest back into the company in the form of efficient equipment and additional labour.
Profit and cash flow share equal importance when it comes to running a successful business. Just as important is your business insurance. Paying out of pocket for damages resulting from claims or lawsuits can negatively impact profit and cash flow. Instead, ensure your business retains the proper liability coverage, giving you the ability to avoid a major hit to your savings account. Be sure to check out our instant quote generator, where you can get an estimate on market-leading insurance in seconds! Simply enter your occupation and expected revenue to get started. For more information, contact a team member today.