Cash Flow Vs. Profit And Which Is More Important

What is Cash Flow?

Cash flow is the cycle of funds going into and out of your business bank account from its operations, investing, and financing activities. It’s the amount of liquid cash that you have at your disposal at any given time. Your business can either be cash flow positive or cash flow negative.

• Positive cash flow is the result when cash inflows are greater than your cash outflows, or when there is more cash coming into your account than you are spending. Examples of inflow include the sales of services and products provided or money coming in from accounts receivable.
• Negative cash flow happens when your cash outflows are greater than your cash inflows. In essence, spending more than you are bringing in. Examples of outflow include payroll, taxes, rent, or inventory.



Cash flow is what allows you to pay your expenses on time, including suppliers, employees, rent, insurance, and other operational costs.

What Is Profit?

Profit, as opposed to cash flow, is the amount of money that remains from your sales revenue after costs have been subtracted. There are two main types of profit:

• Gross Profit. The profit made by your company after costs that are directly associated with providing goods/services has been deducted.
• Net profit. The profit made by your company after all other costs, including taxes and operating expenses (rent, payroll, etc.) has been deducted.



While raising profits is beneficial for your company’s bottom line, it’s important to remember that new sources of profitability, perhaps the development of a new product, may raise expenses, pushing costs beyond the breakeven point and causing your company to run low on money if operations are mismanaged.

Profit indicates that your business is making more money than it spends to stay in business.

Which Is More Important?

The reality is that both cash flow and profit are needed. It’s not a same-same comparison since profitability is more important over time, cash flow and the availability of working capital is what will affect your daily operations.

The Takeaway

It is quite easy to oversimplify success or failure in business by reducing it to commonplace terms that seem the same but have major differences. There is a misunderstanding among many business owners that profits and cash flow are the same things. Indeed, they are not. In order for a business to thrive, it must generate profits while also operating with positive cash flow. The two terms represent different financial parameters, but in order to succeed, it is important for a business to have a solid system to keep track of both.

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