In the old economy, cash was king. The more cash you had in your pocket, the more successful you were. But times have changed. Today, cash is at a premium, and most businesses can’t afford to hang onto it for very long. Especially when looking to grow their business and expand their reach, many businesses are forced to question whether or not cash flow is a profit-making activity.
Cash flow is the money that comes into your business from all sources – sales, expenses, taxes, etc. – minus the money that leaves your business. From a profitability standpoint, cash flow is everything, and anything that takes longer than days to months to come in should be judged on its own merits as opposed to how it relates to profits made from other activities.
Is Cashflow Profit?
When you look at cash flow, it’s easy to think, “is this a profit?”. The truth is that it depends on a lot of factors and is a very complicated issue. The first thing to understand is why cash flow is important.
There are many reasons to care about cash flow. Cash flow is key to growth. When you have lots of cash, you can take calculated risks and make big bets to grow your business and expand your reach. This is probably the main reason to grow.
If cash flow is a profit, then growth is the end goal of a business, right? But cash flow isn’t just important to grow. Cash flow is an important signal about profitability. If a company’s cash flow is negative, that means the company is losing money. That’s not something that should be ignored. But it’s also important to understand what’s happening underneath the surface. Why is cash flow important?
Why is Cash Flow Important?
- Growth – Cash is a stock of the business. It can be used to invest in new marketing campaigns, expand your product line or buy more expensive items, such as machines that will make your production rate more efficient.
- Expansion – Cash is also a tool to expand your business. You can borrow against your accounts receivable, get a new computer system, and hire new employees.
- Debt – When you have a large amount of cash, you aren’t necessarily “cash poor,” but you are cash smart. You have the ability to take on debt. If the interest is lower than the cost of your debt, you are cash rich. If the interest is higher, you have to pay cash.
The Best Way to Think About Cash Flow
If you’re trying to figure out if cash flow is a profit, you can’t just look at the money coming in and the money going out because that would be comparing apples to oranges. You really want to look at the difference between expenses and revenue. That’s when you can start to see if the cash flow is a profit.
So what are “cash expenses”? These are all of the expenses associated with running your business, including things like your rent, your utilities, your employee wages, and the cost of your inventory. Now, this sounds simple enough, but there is a big difference between these two items.
Your rent money will most likely be there tomorrow. Your employee wages might be a bit hit or miss depending on the month. But your inventory will most likely be gone in a month, so it doesn’t have that same level of predictability. The cash flow is not a profit if your expenses are high and you have low revenue.
The Tricky Part About Profitability and Cash Flow
The tricky part about profitability and cash flow is that the two don’t necessarily line up. You might have a high gross margin on your products, meaning they are priced very low, but high expenses that eat into your profits. This can be tricky to understand and messes with your head a little bit.
It’s easy to start thinking, “this is a profit,” when looking at it from the angle of “this is profitable.” Let’s say you look at your expenses, and they are high, but they are also in line with your revenue. You are cash efficient because you are generating a profit on your spending.
This could be good or bad. It depends on a lot of factors, and it’s not as black and white as “this is a profit.” It might be you have a good expense management system in place that takes a lot of the guesswork out of the expense side of running a business.
Cash flow is an important part of a business, but it is not a profit. It’s important to look at the difference between expenses and revenue when trying to figure out if your cash flow is a profit. Some expenses are more predictable than others, which may help you determine whether or not your cash flow is a profit. But that’s not always the case.
The best way to think about cash flow is to determine the difference between expenses and revenue. When you think about it, it makes a lot of sense. When you think about cash flow, you should be thinking about how efficiently your business is at generating profit from expenses. This will allow you to make the most of your cash flow, which will help you grow your business.