At a Glance: Cash Flow vs. Profit for Small Businesses
In a nutshell, cash flow vs. profits may be defined as:
Cash flow indicates how much money is going in and out of your business. Profit shows how much money you have left once you’ve cleared up all your expenses.
Your cash flow is reported in the cash flow statement only while profits are reported in the income statement only.
It’s entirely possible for your business to be profitable yet have a negative cash flow. In fact, it’s also possible for you to have a positive cash flow and no profits.
Understanding the difference between Cash Flow vs. Profit for Small Businesses
Now that we have some basic concepts out of the way, let’s dive into the subject in more detail:
Cash Flow explained
As discussed above, cash flow is the money moving in and out of the business during a set timeframe. So, when you have positive cash flow, that means more money is coming in than going out. Negative cash flow means the opposite, more money is going out than coming in.
Here’s a generic example:
You bought some car parts for your automotive maintenance business for, say, £10. However, you were unable to sell them off before ‘end of day’ like you had anticipated. So, £10 flowed out of your business, but nothing flowed in. Your cash flow for the day is ‘negative’.
The next day, you got lucky: the parts got sold for £20. So, £10 flowed out of your business during the week but £20 flowed in once you sold the car parts. Your cash flow for the week is ‘positive’.
One important distinction we must understand from the outset is that cash flow is not the same as revenue and expenses. You may get a sale today but not receive the actual payment for, let’s say, 2 weeks or up to a month. So, that’s money not flowing into your business – that is, until it arrives in your business bank account.
We can apply this analogy to expenses too: you might buy a part today but not pay for it right away. Money will only flow out of your business once it leaves your business bank account.
Your cash flow is reported in the cash flow statement, a financial document outlining how your startup’s or small business’s cash exchange took place during a specified timeframe.
Cash flow is not measured at any given time but rather measured over a period, such as a month, quarter, or year. It is not to be confused with other financial documents, such as your balance sheet.
Profit for Small Business explained
Also referred to as net income, profit is the amount of money you have left after all your costs have been subtracted from your sales revenue. So, if there is revenue remaining after you subtract costs, you have profit. A loss means you have exceeded your projected revenue.
Profit is reported as:
Gross profit – This refers to profits retained after costs directly connected with providing goods and services are deducted. E.g., subtracting sales commission, delivery, and inventory from your revenue will help you arrive at your gross profit figure.
Net profit – This refers to profits retained after all other costs have been deducted. So, this means payroll, taxes, rent, and other similar costs.
Profitable startups and small businesses have what’s called leftover capital, which can be utilised for many purposes, including:
Building and growing the business
Expanding to more diverse revenue sources
Distributing dividends
Paying off long-term debts
Investing in infrastructure
Profits are reported in an income statement, also known as the P&L (profit and loss) statement. This document outlines your business’s revenue and expenses, and therefore, helps you understand gains or losses during a specific timeframe.
Conclusion: Which one is more important?
Neither! Because both cash flow and profit for small business indicate a variety of financial facts about your business.
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