What is the Difference between Profitability and Cash Flow

 

When it comes to profit & cash flow both the terms are different for a profitable and growing business. Yes, these two terms are completely different.

Both the elements are crucial for any business to grow and flourish. Both the elements function differently for a business. Let us learn about how these two elements are different.

 

Profit

Profit is remaining amount after deduction of all expenses from the revenue generated by the business. It goes without saying that any business should earn profits in order to sustain in the market for a long term. In any business the expenses increase towards launching new products or any other investments for the business and thus the business experiences less profits in short span of time.

Cash flow

Cash flow means inflow & outflow of cash from a specific business. It is important to manage the cash flow properly to carry out daily operations, buying inventory, paying taxes, giving out salaries to the employees and many other costs smoothly.

Basically, cash flow gives you a fair idea of the actual cash available for your business. On the other hand profit will not help you get any idea.

 

Many businesses have this misconception that profit & cash flow are similar to each other. But, they are having no similarity. For any business to survive it should make profits and also maintain appropriate cash flow. The two elements reflect two different financial parameters but for any business to survive in the long run need to have a system that tracks both elements accurately.

The cash flow can either make or break a business. For any business actually cash flow decides its ability to survive and not the profit.

 

Why cash flow is crucial for every business?

 

Maintaining debt and bills

It is important to have sufficient amount of cash in hand to run any business successfully. If you have borrowed funds to purchase equipment, inventory then you need sufficient amount of cash flow to make repayments on time to avoid paying extra cash as penalty.

Buying inventory

When you have positive cash flow that means there is enough money in hand to buy inventory whenever you need. There can be adverse effects on your business if you do not have enough cash in hand like negative customer experience, stock outs and you may also land up in trouble when you have to borrow more funds to repay the existing debts.

Controlling high sales time

There can be increase in demand thereby increasing your expenses in business like staff expenses, warehouse space, inventory expenses, marketing efforts etc. When there is positive cash flow available you will be able to make important business decisions easily and will be prepared to encounter high sales periods by investing correctly which will directly help your business do well and generate profits during peak season.

Help your business grow

Expansion is necessary with time which also needs you to invest money in resources and in various promotional activities. All the activities need money that again means your business should have required cash flow to expand and make necessary investments when the opportunity knocks.

Managing cash flow properly is essential

If your business is making profits in short term, then it can sustain in long run as well if you have enough cash to clear all your bills and make necessary investments in business.

 

If your business is making high profit but the cash flow is low then your business will be called as a profitable business that is not capable of paying the bills. On the other hand if you are paying all your bills also doesn’t mean your business is profitable. If any business have borrowed funds to overcome cash flow issue the debt on the loan would automatically increase thereby increasing the cost per unit and in such cases your business will not be profitable even after having enough cash available.

Irrespective of what business model you are using your business is at risk if you are not able to manage the cash flow well. All successful business maintains cash reserve and therefore they are profitable.

You can seek help from financial planner to work out the cash flow. Positive cash flow control will not happen overnight. It needs proper planning and help from professionals. The professionals in the finance sector can help your business develop a positive cash flow by conducting analysis and then planning it right. They will help you learnt the aspects that would help your business have enough cash in hand to help you make important business decisions smartly and invest in new opportunities.

The profit and cash flow are different elements in a business and they aren’t similar to each other. Both the elements are important. You need to look upon each of the two elements closely and manage them properly. It is always better to seek help from financial consultants so that you know how to manage cash flow properly and invest in new opportunities wisely.

You can help your business become profitable with the right approach towards the management of cash flow and managing profits to avoid getting into high debts.

For any business to run smoothly having enough cash in hand is essential and towards the growth of your business you can grab the new opportunities and make investments only if you have enough cash flow.

Again if your cash flow is positive doesn’t always mean your business is profitable and on the other hand if your business is profitable and still you are not able to pay bills then again you are stuck. It means you have to take care of both components for a business to grow. Do not think about cash flow and profit as similar elements as they are different and affect the business differently. So they need to be taken care of equally. Make sure you consider the two important elements of business and manage them well. Any help for financial problems contact gtacredit.com or call 416 650 1100

 

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