7 min read
As a growing business, making more money is your primary end goal. An equally important goal, however, involves optimally managing the money that you do make. Profit and cash flow are often conflated, but they are unique concepts that must be understood and planned for in their own right. Here, we break this down in detail:
What is a profit?
- Gross profit is the profit made after deducting costs directly related to the provision of goods and services.
- Net profit is the profit made after further deducting other expenses like payroll, rent and tax.
What is cash flow?
Examples of profit and cash flow differences
Which is more important, profit or cash flow?
Strategies for managing profit and cash flow
Managing profit and cash flow is not a one-time task but requires regular monitoring and adjustment. It is also essential to understand that the following strategies will vary based on business type, industry, size, and lifecycle stage. Seek advice from Golding Accountancy for a strategy tailored to your business circumstances.
Over to you
Both profit and cash flow measure aspects of a company’s financial health. Cash flow helps the company make smart financial choices based on whether or not it has the funds to meet immediate expenses. On the other hand, profit indicates trends in sales. It thus allows the company to align its objectives with its actual performance, such as if there are seasonal fluctuations to be accounted for.
It might seem counterintuitive, but high growth could negatively affect your cash flow. For example, when business is good, you might take on more orders than you have the cash to fulfil. At that point, you must rustle up cash by taking a loan or selling stock, which is not ideal. Therefore, it is vital not to lose sight of short-term practicalities in pursuing long-term growth.