Every small business owner has one common goal – profitability. But business cash flow can sometimes be a more accurate measure of viability.
That’s because a company can be profitable and still go bankrupt from cash flow problems. In fact, it is cash flow issues that are often cited as the primary reason small businesses fails. Understanding the differences between profit and cash flow can help you target your efforts to keep your business going.
What is Profit?
Again, in basic terms, a profit is the remaining money from revenue after you pay all of your expenses. Being profitable means that you make more money than it costs you to produce goods or provide a service. Your business’ profits are also the basis used to determine the amount of taxes you’ll be required to pay.
In the long run, a business won’t survive unless it is profitable, as the company will draw down its available cash. And profit is key for long-term expansion as it is used to fund the necessary costs for businesses to grow.
What Is Business Cash Flow?
In basic accounting terms, business cash flow is the inflow and outflow of money from a business. This is where funds come from to pay for daily operations, taxes, purchasing inventory, paying employees and all operating costs
So even if you’re profitable, your business’ survival depends on whether you have cash to pay the bills. If your business is expecting customers to pay an entire invoice in June, which will make the company profitable, if you can’t pay the rent in February, it’s hard to continue operating.
Small businesses often fail before they can ever record a profit because owners are not prepared for the early stages when cash outlays considerably exceed cash inflow. Always having available cash is critical, but having positive cash flow indicates your business’ ability to generate and use cash.
Cash flow can come from a variety of sources including sales, infusion from a loan, or even interest on savings and investments. If you have positive cash flow, it means you can make further investments in your business to hire more employees or expand.
How to Improve Cash Flow and Profit
In an ideal world, a small business would have both positive cash flow and robust profits. However, nearly every small business goes through periods when it does not achieve either one or both.
Essentially, there are two ways to increase profits, either increase revenue or reduce costs. Most business owners have to balance these two actions in order to improve profit. But it can take some time to implement, although the impact is likely to be more beneficial to the business in the long term.
Meanwhile, cash flow can be improved in quicker ways, e.g., finding investors, a loan from a bank or an alternative financial lender. A decision to take a loan is one that should be considered carefully in terms of repayment as that will draw from cash flow. But if a business is on the brink of survival with an opportunity to improve its cash flow within a short-time frame, this may be the best option.