Misunderstanding Cash Flow and Profits is Bad for Business

Business Success is About More Than Red and Black

 

It is pretty easy to oversimplify success or failure in a business by reducing it to commonplace terms: black and red, assets and liabilities, boom and bust, profit and loss.

The reality is more complex. In fact, it is so complex that it’s possible to be a profitable business without being an entirely successful one.

Confused? It’s all about cash flow.

There is a common misconception among many business owners that profits and cash flow are the same thing. They are not. For a business to thrive, it must generate profits while also operating with positive cash flow.

The availability of cash can truly make or break an organization. Cash flow, not profits, determine viability. In fact, one study found that 82 percent of businesses fail as a result of poor cash flow management.

What it Means to be “Cash Poor”

By definition, profit is the surplus after all expenses are deducted from revenue, and it is the basis on which tax is calculated.

On the other hand, cash flow is the amount of available cash within a business at any given time as a result of the inflow and outflow of money. Moreover, profits and cash flow can exist in varying degrees of balance. Consider:

  • High profit and low cash flow results in a profitable business unable to pay its bills.
  • Just because a business can pay all of its bills, doesn’t mean it is profitable.

Cash is the lifeblood of any business, and the key indicator of financial health. Cash is necessary for daily operations, taxes, purchasing inventory, meeting payroll, and more.

Regardless of how great your business model is, you will not survive if you cannot manage your company’s cash. Small-to-medium businesses are at highest risk of being “cash poor” because they constantly re-invest profits into the operation. Larger, more established businesses frequently have a cash reserve.

Good cash flow management doesn’t happen by accident. It takes planning, and often, professional assistance such as what Foresight CFO provides. Our team has a powerful combination of education, experience, and specialized training and certification to meet the specific needs of our clients.

Learn more about our company and services at our website, and if you want to talk further about how we can help you, fill out this online form and we will get in touch with you.