The difference between cash flow and profit — how to keep your business cash liquid

The difference between cash flow and profit — how to keep your business cash liquid

Making a profit is the primary purpose of every firm. One of your main financial goals as a business owner is to create enough sales with a large enough profit margin to turn a profit. But what is the distinction between profit and cash flow? What’s more, why is cash king?

What is the distinction between profit and cash flow?

To truly comprehend the distinction between making a profit and controlling cash flow, we must first define both concepts. You may believe that looking into the books is a task for your accountant but knowing how to manage your profit and cash flow is a crucial business skill.

Let’s examine the distinctions more closely:

What exactly is profit?

After you’ve paid your costs, supplier payments, and taxes, profit is what’s leftover from your earnings. It’s motivated by the desire to make a profit and provide value to your products and/or services.

What exactly is cash flow?

The constant process of ensuring that the firm has the accessible cash (or ‘liquid’ cash) it needs to function is known as cash flow. This provides the funds required to trade, pay suppliers, cover labour, or purchase raw materials, among other things.

Why is it so vital to have a good cash flow?

‘Cash is king!’ may seem a cliché these days, but it’s a principle that drives any successful company plan. Yes, it’s fantastic to earn a profit at the end of the year, but if you don’t manage your cash flow, your firm may not make it to the end of the year.

To improve your financial health, you’ll require effective cash flow management. And if you don’t keep a close check on your financial flow, things may easily spiral out of control.

A company might have strong revenues and profits yet still have a cash flow problem. To put it another way, it can make a profit at the end of the term but have very little liquid capital to finance its day-to-day operations throughout that time.

Talk to us about how we can help you improve your cash flow management.

Being in control of your cash inflows (what you earn) and outflows (what you spend) is the essence of good cash flow management. To attain ‘positive cash flow,’ you must try to keep your inflows larger than your outflows on a regular basis.

As your advisor, we’ll assist you in setting up precise cash flow reporting and forecasts so you can maintain the optimal positive cash flow situation for your company. We’ll also look at how to keep your revenues high, your margins lucrative, and your financial goals on track.

Please feel free to contact us to discuss your cash flow management.