Business Finance

Cash Flow Vs Profit: What’s The Difference?

May 17, 2024 • 6 min read
consistent cash flow small business
Table of Contents

      What’s the difference between cash flow and profit? 

      As a business owner, these two terms can feel interchangeable. But the truth is, they’re far from it—and knowing when to prioritize one over the other can help you make better strategic decisions in that moment.

      What is cash flow?

      Whether you’re just starting a business or have an established brand, you’ll feel the effects of cash flow similarly. Cash flow is simply the movement of liquid money (cash) in and out of your business at a specific point in time.

      When you execute a business transaction and receive money, that’s an inflow of cash. When you spend money on inventory, bills, or other expenses, that’s an outflow of cash. As you track the movement (flow) of cash in and out of your business, you’ll find that you are either operating:

      Cash flow negativeCash flow positive
      You’re spending more cash than you’re bringing in.You’re bringing more cash in than you’re sending out.

      If you have positive cash flow, you have enough cash to cover your financial obligations. If you’re operating with negative cash flow, you are not bringing in enough cash to cover your current expenses and will likely need additional business financing to continue running at your current pace.

      What is profit?

      Profit refers to the remaining revenue after all expenses are paid. If you have a positive value after subtracting total expenses from total revenue, then you’re profitable. If you have a negative value, you’re spending more than you’re making over that timeframe and are operating with a loss.

      Profit can be used in many ways. You can distribute profit to other owners or shareholders, invest it back into the business, or save it in a reserve fund in case of emergency.

      For many small businesses, profitability fluctuates throughout the year. Take toy and hobby retailers, for example, which arguably see the bulk of their sales in the final quarter of each year. This imbalance creates cyclical ebbs and flows of profitability, which can be misleading without the proper context.

      What’s the difference between profit and cash flow?

      Cash flow and profit are just two of many financial metrics business owners and investors use to assess the health of a company. Both measurements have their own advantages and disadvantages, and it’s up to you to understand how to use each to make better strategic decisions.

      However, the difference between profit and cash flow can be tricky to grasp because they both relate to the balance of money within your business. Complicating the matter further, businesses can actually operate with a positive cash flow without being profitable—and may be profitable with a negative cash flow.

      Timing is the subtle difference that needs to be considered when comparing cash flow to profit.

      Cash flow focuses on the past, looking at the actual money that has come in or left your business at a specific point in time. Profit looks at the past, present, and future of your business and includes liabilities like accounts receivables and long-term debt, which are expected expenses or future cash.

      For example, if you sell an item on credit, you don’t actually have the cash on hand—it’s an account receivable, which still needs to be collected. However, it’s considered revenue because the liability of payment has passed on to your customer, and it is used to measure profitability.

      On the other hand, cash flow will only measure money that comes in and leaves your business. As a result, it won’t recognize that transaction until the cash is received from the credit purchase.

      When to prioritize cash flow vs. profit.

      Cash flow and profit both have their purposes as financial metrics, and business owners would be wise to measure and analyze each ongoingly and for different scenarios.  

      For example, if you want to have an overarching view of your business and its long-term viability, profit can shed more insight than cash flow because it takes a holistic view of your income and financial obligations. However, if you want to see a snapshot of your financial efficiencies at a specific point in time, cash flow may give you more perspective because it’s focused more on your day-to-day operations.

      Quiz time:  Now, it’s your turn.

      We’ve outlined the difference between cash flow and profit as well as when each is most important. So, let’s take a look at a few scenarios and see if you can apply this understanding to real-world examples.

      At the end of the quiz, we’ll see how you did.

      Cash flow vs profit: Which should you prioritize?

      Next

      #1. Your restaurant recently purchased a food truck to diversify and scale. What’s more important to your business right now?

      ANSWER: In this scenario, cash flow would be more important than profit.
      When you start a business, focus on maintaining positive cash flow to cover expenses and debt. It may take time to see a return on investment, so prioritize short-term expenses and financial consistency to sustain the business.
      Next

      #2. Your construction company is completing a job with net-45 payment terms. What’s more important to your business right now? ? Net payment terms means your business takes on the expenses and financial risks needed to complete a job with the expectation of receiving payment within a specified window after the job is finished. With net-45 terms, you will be paid sometime within 45 days after completing the job.

      ANSWER. In this scenario, profit is more important than cash flow. 

      Your business will have negative cash flow throughout this contract and will only make a profit once the contract is closed, which will happen within 45 days after completion. You need to complete the job for less than what you are charging the client to turn a profit, otherwise, you will end up with a net loss. Focus on keeping your expenses down to ensure profitability once the job is completed, regardless of the payment terms or the type of business you run.

      Next

      #3. You’re opening a brand-new laundromat business and took out a startup loan to cover the investment. What’s more important to your business right now?

      ANSWER: In this scenario, cash flow would be more important than profit.
      It’s important to prioritize cash flow over profit when you first start your own business. While it’s essential to reach profitability, your main focus should be bringing in enough cash to cover your current obligations such as rent, utilities, payroll, and debt repayments. This will help you keep your doors open and ensure the sustainability of your business.
      Next

      #4. You’re a construction company with several projects near completion that have tied up most of your assets. What’s more important to your business right now?

      Answer: In this scenario, cash flow is more important than profit.

      To take on and cover the expenses of new projects, you need new cash coming in now regardless of the profitability of the projects near completion. Access to business financing would give you the funds you need now to generate even more revenue in the future.

      Next

      #5. You’re preparing your business for valuation as part of an IPO or acquisition. What’s more important to your business right now?

      Answer: In this scenario, profit is more important than cash flow.

      The company’s overall profit will hold the most weight in the valuation process. Demonstrating consistent profitability showcases financial stability and growth potential, impacting how investors, analysts, and the market perceive the organization.

      Next

      #6. You run a business with seasonal revenue fluctuations and expect a downturn in sales. What’s more important to your business right now?

      Answer: In this scenario, cash flow is more important than profit.

      For businesses with seasonal fluctuations in revenue, emphasizing cash flow over profit helps manage irregular income patterns effectively. Maintaining a healthy cash flow enables these businesses to bridge gaps during slow seasons, pay suppliers, and prepare for peak periods without relying solely on profitability.

      Next

      #7. You run a freight trucking company and have the opportunity to double your fleet and service area. What’s more important to your business right now?

      Answer: In this scenario, cash flow is more important than profit.

      Cash flow plays a pivotal role in business expansions. Positive cash flow ensures the availability of resources for capital expenditures, equipment upgrades, and infrastructure development without solely relying on current profitability.

      Finish

      Results

      How Did You Score?

      If you answered all 8 questions correctly, awesome. If you didn’t, it’s okay—understanding the difference between profit and cash flow can be tricky. Regardless of how well you did on the quiz above, you’re on the right track if you made it this far because you’re serious about making better strategic business decisions.

      How Did You Score?

      If you answered all 8 questions correctly, awesome. If you didn’t, it’s okay—understanding the difference between profit and cash flow can be tricky. Regardless of how well you did on the quiz above, you’re on the right track if you made it this far because you’re serious about making better strategic business decisions.

      Cash flow or profit: What’s more important?

      Cash flow and profit are both important, and business owners and investors may focus on each at different times and for specific reasons. Determining whether profit or cash flow is more important will be based on your unique situation.

      Understanding the relationship between cash flow and profit can help you identify when to look at one or the other. This insight alone will put you in a better position to make the right decisions to guide your business forward.

      Manage your finances with confidence.

      View loan offers, receive payments, and track your cash flow with the Lendio mobile app.

      About the author
      Derek Miller

      Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.

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