Cash flow vs profit: What you need to know as a small business owner

Yes. Simply put, profit is anything that’s left of your business income after accounting for all business expenses. This figure is shown on your business financial statements and on the profit and loss statement.  

However, it’s important to consider all types of profit when running a small business. The three forms you’re most likely to encounter are: 

1. Gross Profit: Business income minus the direct costs to your business. It includes expenses like materials or wages of your assembly team; essentially, how much it costs to directly make your product or deliver your service. 
2. Operating Profit: Gross profit minus operating expenses. Operating expenses are additional costs incurred by your business that don’t directly contribute to the creation of your product or service. For example: rent, admin salaries or computer systems. 
3. Net profit: Operating profit minus final expenses like tax. 

Your profit is a key indicator of business success; however, it’s not the be-all and end-all.  

Not quite. Cash flow is laid out in statements, which show all the money leaving and entering your business bank account. Cash flow highlights when your business could end up with surplus cash, and when it might struggle. 

In short, it’s more of a real-time snapshot of your business’ financial health to help you see whether you have enough cash to pay expenses, or even expand.

The easiest way to distinguish between the two is to consider that profit is an accounting concept, normally looking at past data about the previous financial year. Cash flow, however, can be monitored daily and highlights potential red flags as soon as they appear. 

1. You can’t pay bills with profit 

A common misconception is that profit equals cash – this is not the case. If you provide your customers with 60-day payment terms but your rent and suppliers only offer you 30 days, then your business is in trouble – even if it is profitable. A simple way to avoid this is to minimise delays between cash inflows and outflows.  If that’s not possible, you must keep an eye on your cash flow to plan ahead. 

2. Poor cash flow can defeat businesses 

A leading cause of business failure. Business owners often fail to consider the seasonality of their business, meaning they struggle to pay liabilities in quieter periods. This leads to reliance on high-interest overdrafts or loans in order to stay afloat, which only worsens the issue in the long term. Think about which points in the year might be (or are) quieter for your business and set some cash aside to avoid falling into this trap. 

3. Investors often look at profit 

Profit is still a very good indicator of a business’ health, and investors like banks are more likely to lend money to support a profitable business. Lenders will often not look twice at unprofitable businesses due to the likelihood of cash flow issues. 

• Regularly track cash flow to understand your business’s unique patterns for better planning.
• Follow up on sales invoices by chasing customers who have missed their agreed payment date and offering early settlement discounts so you receive your cash sooner.
• Complete management accounts frequently to arm yourself with more real-time data to make informed decisions, identify trends, and avoid a nasty financial surprise at the end of the year. 

Both profit and cash are crucial to every business, and a successful business needs to understand how to calculate and manage both effectively to ensure financial success. However, they are not the same, and they are certainly not mutually exclusive. 

If you’re unsure about your business’ financial health or if you’d like help to understand your business’ cash flow needs or profit levels – get in touch.