What is the difference between cash flow and profit?

Cash flow and profit are both key aspects of any business. While you might think the two terms are interchangeable, their functions in running a business are distinct.

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Here, we look at the differences between cash flow and profit, and how cash flow is essential to long-term success.

What is profit?

Profit is the surplus that remains after all expenses are deducted from revenue. Of course, a business should be profitable to survive in the long term, but often initiatives to bring in profit such as new products or business investments can raise expenses, and therefore reduce profits in the short term. 

What is cash flow?

Cash flow refers to the inflow and outflow of money from a business. Managing cash flow effectively is necessary for running daily operations, paying taxes, purchasing inventory, and paying employees and other costs. Unlike profit, cash flow is an indicator of how much actual cash is available to a business at any given time.

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How can a business be profitable but still unsuccessful?

The cause usually lies with poor cash flow management. Simply being profitable is not enough to keep a business running efficiently. For a business to grow, it should be generating profits and operating with a positive cash flow.

Here are just some of the reasons cash flow is important for any business.

  1.     Managing bills and debt

Having enough cash on hand to pay the bills is essential. Similarly, if you’ve borrowed money to buy inventory, equipment and so on, you’ll need to have an adequate cash flow to keep up with your repayment commitments.

  1.     Purchasing inventory

Positive cash flow means you’ll have money available to purchase inventory as and when you need it. Not having enough cash to purchase inventory can have many negative impacts on your business, from stockouts and poor customer experience to acquiring more debt to pay for inventory.

  1.     Handling peak sales periods

With increases in demand come increases in expenses such as inventory costs, warehouse space, staff expenses, and marketing efforts. Positive cash flow allows you to make critical business decisions and prepare for peak periods by making necessary investments – this will put you in a good position to maximize profits when the busy season hits.

  1.     Growing your business

Scaling up over time comes down to investing in resources and promoting your business. All of this costs money, which means you need to have the necessary cash flow available to grow and invest when opportunities arise.

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How to manage cash flow effectively

Above all, even if you’re profitable in the short term, you can only survive and thrive in the long term if you have the cash to pay the bills and invest in the business.

Using a dedicated payment gateway like TradeGecko Payments for your business can help you predict and control your cash flow more accurately by allowing you to bill customers easily and get paid faster.

With our free cash flow model, you can also accurately estimate revenues, orders, and cash – giving you a clear picture of what your cash flow will look like over time and allowing you to plan accordingly.

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