Why You Need to Know the Difference Between Profit & Cash Flow

Business owners seem to be in a constant search for one number to tell them if their company is doing well or not.

We get it. You’re busy and would much rather spend your energy doing whatever it is you do instead of staring at numbers on a spreadsheet. Having one number to look at sure would simplify things.

But which number should you focus on?

Profit seems like it would be the obvious thing to track.

On the other hand, cash flow is pretty important too.

“But aren’t profit and cash flow the same thing?”

Good question.

No, they aren’t. And confusing the two can cause problems.

Cash Flow is the measurement of how money is flowing into and out of your business.

When you spend money, it goes down. When customers give you money, it goes up. And up is good…obviously better than down. You can tell whether your cash flow is positive or negative by simply looking at your bank account balance at any given point in time.

While this sure sounds like an easy way to track your company’s financial health, it can be misleading. Cash flow is only a snapshot of your financial position. It doesn’t show if you’re actually making (i.e. “keeping”) any money in the long run. For that, you need to look at profit.

Profit is the measurement of how much money is left after all expenses have been paid.

In order to make money, you have to spend money. You may have to pay a vendor or manufacturer in order to have a product to sell. You may have to buy supplies in order to provide a service. Maybe you have to rent an office in order to have a place to work. The list goes on and on.

But the moment you sell your product or service for more than what it cost you to make it, you have made a profit. That money is then yours to do with as you please. However, it doesn’t show you if you’re able to purchase more supplies or next month’s rent. For that, you need to look at cash flow.

“So I need to know both?”

Yes. We know it can get confusing, but both reports—P&L and Cash Flow—are valuable for getting a total picture of your financial position. That’s especially helpful when it comes time to make important decisions about the future growth of your company.

For instance, it is completely possible for a business to show a profit, yet have a negative cash flow because of runaway spending or high overhead. Likewise, it’s possible for a company to have plenty of cash on hand, yet not show a profit…which is the case for many small startups and businesses that are in a period of intense growth in order to compete at a new level.

Investors deciding if your company is worth buying into and owners looking to grow will want to know both pieces of information in order to make wise decisions.

To truly maximize your company’s potential, make sure you know all of your numbers. The best way to do that is to partner with a firm that not only understands accounting but understands you and your business too.

CRS CPA has been teaming up with businesses large and small for over 40 years. We not only know the numbers you need to be seeing, we know how to help you use them to grow and win.

Schedule a call today to learn more!

Mar 10, 2021