Understanding the Difference Between Profits and Cash Flow

The key difference between cash flow and profits; profit indicates the amount of money remaining after paying all expenses; cash flow indicates the net cash in and out of your business. 

 

To illustrate this point, a company can be profitable while having a negative cash flow, which will hinder its ability to pay its expenses. On the contrary, a company can be cash flow positive and increase sales and still fail to make a profit. This often happens with startups and growing companies.

 

Which one is more important? Both profit and cash flow are essential but keep in mind, while it is highly important for a business to be profitable, a good cash flow is crucial. 

 

According to research done, the prime reason small businesses fail is cash flow issues. In fact, a whopping 82% of small businesses fail because of poor cash flow management skills and a poor understanding of cash flow. 

 

Let this fact sink in. A company will typically not go out of  business for lack of profit but rather for lack of cash flow.  

 

Cash flow problems are possible to overcome! Make sure to follow the Cash Flow tag as we will post best practices on how to stay cash flow positive.

 

Photo Credit: Micheile Henderson

 

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