As a business owner, two terms you hear all the time are “profit” and “cash flow.” The problem is, people often use them interchangeably, but they’re not the same thing. In order to better understand the differences, let’s break down the basics of each, so you have a better picture of your company’s financial health.
Profit = Revenue – Expenses
The concept of profit is deceivingly simple. It’s what your business has left over from revenue after all expenses are paid.
Examples of Expenses that Take Away from Profit
- Equipment and Equipment Depreciation
- Legal Compliance
Why Profit Matters
Depending on how the business is set up, company owners can choose to take the profit as payment or invest it back into the company. Naturally, if the business isn’t thriving and the company owners aren’t getting anything from running it, it will eventually close.
Cash Flow = Cash Inflows – Cash Outflows
Your cash flow can be negative or positive. It’s the result of subtracting your cash outflows from your cash inflows for any given period. It may seem like, at a glance, that a company with positive cash flows is profitable, but that’s not necessarily so.
Examples to Increase Cash Inflows
- Increasing the amount of goods or services you sell
- Increasing the price of your goods or services
- Selling assets, such as unused equipment
- Cutting expenses
- Bringing in equity
- Taking out a loan
- Making payments slower
- Collecting payments faster
Why Cash Flow Matters
There are times when having a negative cash flow isn’t necessarily a bad thing. For example, let’s say the company owners have been putting all profits into an account for a period of time and decide to eventually use them to purchase new equipment. At that moment, the outflows will outpace the inflows, though the company will have gained a valuable asset which may help them increase profitability. Similarly, having a positive cash flow doesn’t mean the company is profitable either. It could mean that the business owner simply added a chunk of his or her own money or took out a business loan.
Of course, these are extreme examples. Negative cash flow often signals that the business is in trouble. When outflows outpace what the business is bringing in, and if the company does not have savings to cover the difference, it has to increase cash inflows to stay afloat.
How to Use Factoring to Increase Cash Flows
If your business is struggling to keep up with demand or can’t make the payments it needs to, you’ve already considered a host of cash flow-increasing options, all bringing a certain degree of risk.
For example, your customers may balk at a rate increase, or you may not be able to increase your output, and your own creditors may not take too kindly to delinquency. For these reasons, businesses turn to invoice factoring as an option for improving their cash flow.
With invoice factoring, the business sells its invoices to another company, such as Interstate Capital. We can pay out much faster than clients do — hours versus weeks and months. There are a myriad of additional benefits to factoring as well. For example, with invoice factoring, companies may be able to reduce their invoicing and collections expenses, too.
Profit vs Cash Flow: Which Matters More?
In short, both profit and cash flow matter. Both are indicators of the company’s financial health. Whereas profit may give businesses a reason to stay open, having a positive cash flow provides it with the means to do so.