What’s More Important To Your Business: Cash Flow or Profits?

Owning and operating a business comes with a wide range of challenges and difficulties. Every owner will have two main goals to pay close attention to — making sure there’s enough cash flow to keep your business running and turning over profits for sustained success. 

Neither will come easy, but they work hand-in-hand with each other to create what you’ve envisioned for your business from the start. Cash flow will likely be your first priority, otherwise your company won’t last to see tomorrow. Once you establish a reliable stream of money, you should focus on making a profit if you want to continue growing. 

Knowing the difference between cash flow and profits is essential to the success of your company. Some businesses will experience a steady cash flow but never see a profit. Other businesses won’t struggle to make a profit, but cash flow is a constant concern. Finding a balance between the two saves you and your employees from crumbling.

Cash Flow Keeps Your Business Running

First, let’s talk about cash flow. 

Every business will have money coming in (hopefully!), as well as a wide range of expenses that need to be accounted for. Cash flow is the amount of money you have at any given time to ensure those bills can be paid for on-time. 

If you don’t have the cash to pay for rent, supplies, or payroll, prepare yourself for a tough road up ahead. Many owners will find themselves taking out loans, looking for investors, or investing their personal funds into their business just to keep it running another day. 

To better organize your current cash flow, you should make a calendar of all expenses that need to be paid and when those payments are due. You should also make a calendar of all revenue coming in and when those payments will be processed, if it can be tracked. This will give you a glimpse of what to expect at any given time.

Profits Determine the Success of Your Business

On the other hand, profits are necessary for the sustained growth of your company. Profits, also referred to as net income, is whatever’s left after all expenses are paid for. If the amount of incoming money is greater than the amount of expenses, your business is turning a profit. 

Profits are important to a business because it shows you have a quality business structure. If your company is struggling to find profits, you may need to consider raising your prices or cutting expenses. This can be a difficult decision to make, especially when trying to keep employees and customers happy at the same time. 

Which One’s More Important To You?

Your business needs both cash flow and profits to survive short-term and long-term. What’s more important to your business will depend on a variety of factors, including how long you’ve been in business, what industry you’re in, what you have to offer, and who you’re selling to. 

If you want to keep your business alive, focus on cash flow. If you want your business to grow, focus on profits — but only if you’ve already established cash flow. If you want to hand those responsibilities over to a professional, contact me today and I’ll be glad to help!

References

Carlson, Rosemary. “Why Cash Flow and Profit Aren’t the Same Thing.” The Balance Small Business, The Balance Small Business, 25 Jan. 2020, www.thebalancesmb.com/are-a-firm-s-cash-flow-and-profit-different-393585.