Most small-scale businesses and start-ups begin with the end (profit) in mind. But what they overlook is the importance of cash flow over profit.
Business owners remain unaware of the fact that cash flow is very important for the financial health of their firm. That is why it’s often recommended to seek the help of accounting services, be it in Malaysia or other parts of the world, to profitably handle your firm’s financial matters.
Profit and cash flow are two sides of the same coin. So what difference does it make when both terms mean ‘making money’?
What is a Profit?
Profit is the surplus revenue after deducting business expenses. It determines the position of a firm in the overall competitive market.
The three main types of profit are gross profit, net profit and operating profit.
What is Cash Flow?
Cash flow is the total amount of cash moving in and out of your business. It better determines the present situation of your business. Usually, cash flow is calculated on a monthly basis.
Cash flow positive is when more money is moving into the business rather than going out during a given time. Cash flow negative indicates more money is spent compared to the amount the business receives. Accounting services operating for businesses aim to maintain positive cash flow to improve sustainability reporting, necessary to keep investors satisfied.
Seven Reasons Why Cash Flow is More Important Than Profit
Here’s why the alluring profit trap isn’t right for your business:
1. Cash Flow Indicates Operational Issues
Positive and negative cash flow fluctuations can indicate operational issues within your firm, something that profit can’t show. For example, if most clients delay responding to invoices or payments, the cash flow can get out of balance. This results in a situation where one month the company experiences loss, while the next month in profit. The source of this trouble lies in the incoming cash flow.
Although your sales are steady, you need to ensure a steady flow of incoming payments as well.
2. Cash Flow Helps With Business Growth
A steady, positive cash flow that is invested to expand your business is a far superior strategy than simply hanging on to small profits. Instead, growth due to continual cash flow can lead to heavy profits in future. It’s a sign of the long-term prosperity of the organization.
3. Cash Flow Is Money at Hand to Pay Debts
Counting only on heavy profits and not leaving any money in the bank can increase your debts. When you don’t pay in time, the late fees and overdrafts are added up to the initial amount. With cash flow, you can pay off the debts and free yourself from the burden in less time. This way, the business continues to have cash in hand to decide upon future investments once the debt is paid off.
4. Cash Flow and Profit Can Convince New Investors
A business that has a steady revenue, net profit and cash flow shows the future potential of a business. Investors would prefer to collaborate with such organizations because they are able to balance their financial graphs well.
5. Positive Cash Flow Indicates Healthy Financial Growth
Profit cannot be predicted, but cash flow helps in predicting the growth of a business. Continuous positive cash flow means you can plan income and investments for the upcoming months as well.
6. Positive Cash Flow Prevents You From Having to Take On Heavy Loans
Taking large loans to manage risky investments seems like a good idea at first but if you have poor cash flow, it can delay the repayments, resulting in an increase in interest. Positive cash flow is a priority as it helps you to manage repayments or even prevent you from needing the loan in the first place.
7. Cash Flow is a Reliable Determiner of Growth
Profit cannot precisely determine where your business stands, while cash flow can. It cannot be manipulated to show business growth when it’s not the case. That’s why owners and investors prefer to determine the health of a business based on the cash flow of an organization. For more information on cash flow or other accounting services, feel free to get in touch with us.