Cashflow vs Profit – Which Is More Important?
Every business leader has heard the phrase “cash is king.” Yet even experienced CEOs and directors can focus too heavily on profit, missing the vital distinction between profit and cashflow. Understanding both is essential for survival and long-term success.
Profit: The Scoreboard of Performance
Profit is what’s left when all your expenses are deducted from income. It reflects how your business is performing on paper, the result shown in your profit and loss statement.
While important, profit can be misleading if viewed in isolation. A business may report strong profits but still run into trouble paying its bills, taxes, or staff. That’s because profit doesn’t equal cash in the bank.
Cashflow: The Lifeblood of the Business
Cashflow is the movement of actual money in and out of your business. It determines whether you can meet commitments, invest in growth, and stay solvent.
Even profitable companies can fail due to poor cashflow, especially those selling on credit or holding high inventory and investing in expensive plant or equipment. When customers delay payment, it starves the business of cash, regardless of its apparent profitability.
Why It Matters for Business Owners and Directors
Strategic Decisions: Expansion or hiring based solely on profit figures can lead to cash shortfalls.
Risk Management: A healthy cash buffer protects operations and staff during downturns.
Sustainable Growth: Profit is the scoreboard, but cashflow is the oxygen that keeps you in the game.
Managing Both Successfully
Maintain cashflow forecasts to anticipate shortfalls and plan accordingly.
Track profit margins to identify where improvements can be made.
Balance receivables and payables and don’t let customers use you as their bank.
Keep a cash reserve or facility for emergencies or opportunities.
Final Thought
Profit is about performance. Cashflow is about survival and growth. Both matter, but without cash, even a profitable business can fail.
If you’re unsure which one your business should focus on right now, it’s time for a chat. Let’s get your numbers working for you, not against you!