If you’re a business owner, you’re no doubt aware of the terms ‘profit’ and ‘cashflow’. But truly understanding the difference between them is key to making sure your business is profitable, sustainable and successful in the long term. So let’s break it down and get to grips with what each of these terms means, how they differ from one another, and why it matters. It’s also worth mentioning that there are numerous resources out there to help you monitor and manage your company’s finances, like small business management software.
What is Profit?
Put simply, profit is the amount of money your business makes after all costs have been taken into account. It includes both revenues (what comes in) as well as expenses (what goes out). A company’s profits are calculated by subtracting the total expenses from the total revenue – if the result is positive, then congratulations – you made a profit!
What is Cashflow?
Cashflow, on the other hand, refers to how much money is moving in and out of your business at any given time. It tracks how much cash has entered or left your business within a certain period of time (usually monthly or annually). Whereas profit measures whether or not your business has made a positive return on investment over a given period of time, cashflow tells you whether there is enough money moving through your business to keep operations running smoothly.
How are They Different?
The main difference between profit and cashflow lies in what they measure — while profit gives an overview of performance over a specific period of time, cashflow tracks activity more closely by showing when money enters or leaves your business. As such, it’s important for businesses to track both their profits and cashflows so that they can get an accurate picture of how well their operations are performing.
Additionally, looking closely at cashflow can help identify potential issues before they become serious problems — if you know where money is coming from and going to each month, then you can make sure that bills are being paid on time and that any shortfalls are addressed quickly.
While profitability is essential for businesses to stay afloat in the long run, having enough cash on hand to pay bills and cover immediate expenses is just as critical
That’s why tracking both profits AND cashflows should be part of any successful business plan – without them, important decisions about how best to grow or scale up could be made without all the facts at hand. So don’t forget – understanding the difference between profits vs cashflow isn’t just important – it’s key to success!
