Despite profitability often being referred to as the most popular statistic when referring to a business’s development, it’s not always the best indicator. To truly discover how a business is doing and growing you must also take into consideration cash flow. Knowing the difference between the two is critical to maintaining a sustainable operation.
What is cash flow?
Cash flow is an outline of the money going into your business, usually in the form of revenue, and the money leaving it, usually as expenses. Cash flow is one of the most vital figures to consider when evaluating a business as it shows how a business is both earning and spending its money. When predicting a business’s future earnings or evaluating its overall health, accountants will compare cash flows month by month which gives an idea of whether a business is doing well or slowing down.
What is profit?
Profit, or net income, is the amount of money a business has after they’ve accounted for all expenses. It’s considered to be the best indicator of a business’s success as it reflects its ability to generate value. No business can truly last long-term without generating a profit.
What’s the difference?
The difference between incoming and outgoing cash flows will usually be close to a business’s on-paper profit. But just because a business is profitable does not mean that it’s doing well. Example, a business can be profitable but have an incoming cash flow that’s too low to sustain that profitability. So, profit is how much money you have left after you get your revenue and pay your expenses while cash flow is when you get and pay the cash. In the long-term, you must eventually gain profit. In the short-term, even if you’re profitable, your success or failure is based on whether you have cash to pay the bills.
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