Cash flow vs. profit:
What is the difference?
Discover the key differences between cash flow and profit. Understand how each impacts your business's financial health and decision-making processes.
Discover the key differences between both
The distinction between cash flow versus profit may be unclear for many business owners. It’s important to understand key financial metrics to maintain and measure the overall success of your business
Types of cash flow
Operating cash flow: Money spent or generated from core business activities and operating expenses
Investing cash flow: Money spent or generated as the result of an investment, such as purchasing or selling property
Financing cash flow: Money spent or generated through financing activities with creditors or by paying off debt
Importance of cash flow
Cash flow is a metric that highlights how funds are moving in and through your business. Does cash flow positive mean profitable? No.
Cash flow and profit each represent a different measurement of your business's financial health.
What is profit?
Your profit, or net income, refers to how much money you’re left with after subtracting all your expenses from your total revenue, or gross income. When your costs exceed your revenue, it’s considered a loss. These metrics are recorded on an income statement.
Types of profit
Gross profit: Money left after subtracting the costs of the goods or services sold from the revenue
Operating profit: The net profit generated from your core, day-to-day business operations
Net profit: Your bottom line, or the income left after all expenses have been subtracted from your revenue
Importance of profit
Profit is a key indicator of overall business performance through financial gains and your business’s likelihood of generating a return on investment.
The key differences between cash flow and profit
How is cash flow different from profit? Managing cash flow is about the rhythm of your business, while profit is a snapshot of your business’s success and growth potential. Three factors cover profit vs cash flow:
Timing of recognition
Profit is recognized when your business has fulfilled its requirements, even if you haven’t received payment yet. Positive cash flow is only recognized after you’ve received payment.
Measurement focus
Cash flow is measured over a time period such as a quarter, while profit is calculated at a specific point in time.
Impact on business operations
Healthy cash flow management ensures that your business can run on a day-to-day basis, while your profit or loss shows what money is left after deducting expenses. It may take years to become a profitable business, but cash flow management impacts how quickly you can achieve it.
Example scenarios
Consider the following two scenarios to understand cash flow vs. profit:
Negative cash flow + net profit: You purchase $1,000 of inventory in July, and a customer buys it all two days later. If you set a 30-day invoice deadline, you may not receive payment until August. Purchasing inventory left you with a negative cash flow for July but a net profit for the transaction once you are paid.
Positive cash flow + net loss: You spend $1,000 on inventory in May and run a sale in June. You offered a loss leader to bring in new customers but didn’t sell enough other inventory to make up for the discount. You’d have a net loss, despite positive cash flow for that month.
Improve your business cash flow
Improving the health of your business by eliminating inefficiencies in your cash flow processes can decrease your stress and give your investors peace of mind. Cut out wasted time. Everyday Funding through U.S. Bank gets your business funded within hours.
