A:

Cash flow and profits are both crucial aspects of a business. For a business to be successful in the long term, it needs to generate profits while also operating with positive cash flow.

What Is Cash Flow?

Cash flow is the inflow and outflow of money from a business. It is necessary for daily operations, taxes, purchasing inventory, and paying employees and operating costs.

Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.

What Is Profit?

Profit is the surplus after all expenses are deducted from revenue. Profit is the overall picture of a business, and the basis on which tax is calculated.

There are three major types of profit that analysts analyze: gross profit, operating profit and net profit. Each type of profit gives the analyst more information about the company's performance, especially when compared against other time periods and industry competitors. All three levels of profitability can be found on the income statement.

Which One Is More Important to a Business?

When determining which one is more important, it depends on the business and the circumstances.

For example, a business may see a profit every month, but its money is tied up in hard assets or accounts receivable, and there is no cash to pay employees. Once a debt is paid or the business sees an influx in revenue, it starts to see positive cash flow again. In this example, cash flow is more important because it keeps the business running while still maintaining a profit. Alternately, a business may see increased revenue and cash flow, but there is a substantial amount of debt so the business does not make a profit.

The absence of a profit eventually has a declining effect on the cash flow. In this instance, a profit is more important. Another thing to remember when determining whether to focus on cash flow or profit is cash flow can be bought. A business owner can put up his or her personal assets as capital into the business or get a small business loan from a bank to keep the business running until it starts seeing cash flow again.

(For more, read What’s a Good Profit Margin for a New Business? or Profitability Indicator Ratios.)

RELATED FAQS
  1. How do net income and operating cash flow differ?

    Net income is the profit a company has earned for a period while cash flow from operating activities measures, in part, the ... Read Answer >>
  2. What is the difference between cash flow and fund flow?

    See how cash flow and fund flow differ from each other, and why fund flow can be used very differently by accountants and ... Read Answer >>
  3. How are cash flow and free cash flow different?

    Both cash flow and free cash flow are financial metrics that measure a company's liquidity, but one shows how effectively ... Read Answer >>
  4. How should I evaluate a company with negative cash flow investing activities?

    Negative cash flow from investing activities should be evaluated since it could be a warning sign. However, it can also mean ... Read Answer >>
  5. How Do operating cash flow and net operating income differ?

    Net operating income and operating cash flow are different metrics used in measuring the financial viability of an investment ... Read Answer >>
Related Articles
  1. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  2. Small Business

    Understanding Cash Flow

    Learn about the different types of cash flows and the importance for businesses to properly manage their cash flows.
  3. Tech

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
  4. Investing

    What Is Cash Flow From Investing Activities?

    Cash flow from investing is listed on a company's cash flow statement and includes any inflows or outflows of cash from a company's long-term investments. 
  5. Investing

    What Is a Cash Flow Statement?

    The Cash Flow Statement measures whether a company generates enough cash to meet its operating expenses.
  6. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  7. Investing

    Cash flow statement: Analyzing cash flow from financing activities

    The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors.
  8. Investing

    Why Cash Management Is Key To Business Success

    Businesses need to generate a healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.
  9. Small Business

    How Small Business Owners Can Create Cash Flow

    Without proper cash flow a business can fail.
RELATED TERMS
  1. Cash Flow Statement

    A cash flow statement is a financial statement that provides ...
  2. Non-Operating Cash Flows

    Non-operating cash flows are inflows and outflows of cash that ...
  3. Sales To Cash Flow Ratio

    The sales to cash flow ratio shows how efficiently a business ...
  4. Unconventional Cash Flow

    An unconventional cash flow is a series of inward and outward ...
  5. Cash Flow-to-Debt Ratio

    The cash flow-to-debt ratio is a measure that compares a company’s ...
  6. Incremental Cash Flow

    Incremental cash flow is the gain received from a new project. ...
Trading Center