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As a small business owner there are two key concepts which can impact your business finances: cash flow and profit. While they might sound similar, they serve different purposes and understanding the distinction between the two can make a significant difference in managing your business effectively. Let’s break it down in simple terms.
When people say “profit” they usually mean the amount of money your business has left over after all expenses have been paid. It’s what remains from your revenue after you’ve deducted costs like salaries, rent, supplies, and taxes. Profit is usually calculated over a specific period, such as a month, quarter, or year, and it comes in three forms:
Cash flow, on the other hand, refers to the movement of money in and out of your business. It tracks the actual cash that comes into your business from sales or investments and the cash that goes out for expenses, loan repayments, and other payments. Cash flow is categorised into three types:
Here’s a breakdown of the key differences between cash flow and profit:
As the old saying goes, businesses don’t go out of business because they are not profitable, they go out of business because they run out of cash.
You might wonder why cash flow is important if your profit is high. The reality is, a profitable business can still face cash flow problems.
For instance, late payments or long payment periods from customers can leave you struggling to pay your bills and suppliers. Even if your profit looks good on paper, your cash flow might be strained because the money you’re owed isn’t in your bank account when you need it. Additionally, investing in new equipment or inventory can drain your cash reserves, even if these purchases are expected to increase profits in the future. Businesses with seasonal ups and downs may have times of high profit but need to manage cash carefully during slower periods to avoid running out of money.
Understanding and managing both profit and cash flow is essential for the health and stability of your business.
If you spot a cash flow gap, you might need external help to keep things running smoothly. Access to finance such as a business loan, could provide the boost you need to cover costs. At Capitalise, we work with over 100 business lenders to help find the right option for your business. Just start a search for funding to find out your options.
Check your eligibility without affecting your credit score and search for funding from over 100 UK lenders.
Ollie is Co-founder and Chief Product Officer for Capitalise. He is a serial tech start-up product lead and has worked alongside VCs, technologists, service design experts & business minds to build market leading digital products in start-ups to multi-nationals.
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