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 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 >>
  2. What are some examples of how cash flows can be manipulated or distorted?

    Cash flows can be manipulated or distorted in many ways, including changing accounts payable, misusing non-operating cash ... Read Answer >>
  3. What is the difference between a cash flow statement and an income statement?

    Learn how a cash flow statement measures the sources and uses of a company's cash, while an income statement measures a company's ... Read Answer >>
  4. What's the formula for calculating free cash flow?

    Free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures. High free ... Read Answer >>
  5. What factors decrease cash flow from operating activities?

    Understand the types of factors that reduce cash flow from operation activities. Discover how declining net income and efficiency ... Read Answer >>
Related Articles
  1. 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?
  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. Investing

    Cash Flow on Steroids: Why Companies Cheat

    Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.
  4. Small Business

    How Small Business Owners Can Create Cash Flow

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

    Cash flow is the net amount of cash and cash-equivalents being ...
  2. Price to Free Cash Flow

    Price to free cash flow is an equity valuation metric used to ...
  3. Operating Cash Flow (OCF)

    Operating Cash Flow (or OCF) is a measure of the amount of cash ...
  4. Cash Flow From Operating Activities (CFO)

    Cash Flow From Operating Activities (CFO) is an accounting item ...
  5. Cash Flow From Investing Activities

    Cash flow from investing activities reports the total change ...
  6. Cash Flow Per Share

    Cash flow per share is a measure of a firm's financial strength, ...
Trading Center