Are These Two Sides of the Same Card?
The difference between Cash flow and Profit is not something that is difficult to understand. Cash flow normally shows the total flow of the cash (inflow and outflow) in a business whereas Profit is all that is left after paying out all of the business’s expenses of all kinds whether it is the salary of the employees or the electricity bill.
A cash flow statement provides a detailed analysis of inflows and outflows of a business – they can sometimes show Loss if outflows are more than inflows. Then the entire plan structure and strategy of the company should be changed accordingly.
CASH FLOW OR PROFIT? What is more Important?
The health of a company is determined by two of its pillars – its Cash Flows and Profit. If someone is interested enough in your company to make an investment then they could ask for either of these statements or both of these. Finding the balance between cash flows can lead to higher profit which would automatically make presentations to potential investors much better. If someone does not find your cash flows good enough then they will probably back off and will not invest in your company.
No matter what, Profit and Cash Flows remain two critical aspects of a company’s health. They are always put together because one is related to another. An increase in cash outflows could mean a decrease in profit (or loss) and vice versa. If your sales are up then cash inflow increases hence profit could increase but this is not necessary since making sales does not mean profit is certain. If things are not well-managed and these two metrics are not put against each other; then a company’s potential may suffer either downfall or nothing.
As a business owner, key employee, investor, or entrepreneur, you must understand both metrics and how they interact with each other if you wish to evaluate the financial health of a business.
Cash flow and Profit are just two of the numerous financial terms, ratios, and metrics that you need to understand to make informed decisions about a business. By gaining proper knowledge only you can manage these things.
