Why Cash Flow Matters More Than Profit (And How to Improve It)

Many business owners think profit is the most important sign of success. While profit is a good thing, it doesn’t mean your business is safe. A company can be profitable on paper but still struggle to pay bills. This is where cash flow comes in.

Having a good understanding of cash flow vs. profit can help businesses stay financially healthy. Even if a company earns a lot, if cash isn’t available when needed, the business could run into trouble. 

In this article, we’ll explain why cash flow is important, how it differs from profit, and how to improve cash flow so your business stays strong.

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Cash flow vs. profit: What’s the difference?

To manage your finances well, you first need to understand the difference between cash flow vs. profit.

• Profit is what’s left after you subtract all costs from your revenue. It shows if your business is making money overall.
• Cash flow is the actual movement of money in and out of your business. It tells you if you have enough cash available to pay for everyday expenses.

This means a business can show a profit on paper but still have cash flow problems if it doesn’t have enough money coming in at the right time.

For example, imagine a business that sells products on credit. They record a sale (which adds to profit), but the customer doesn’t pay for 60 days. In the meantime, the business still needs to pay wages, rent, and suppliers. Without cash on hand, they could struggle to cover these costs.

This is why cash flow vs. revenue is also important to understand. Revenue is the total money earned from sales, but it doesn’t account for when that money will be received. Cash flow looks at when money actually moves in and out of your business.

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Why cash flow is important

Now that we know the difference between cash flow vs. profit, let’s look at why cash flow is important for business survival.

Cash flow keeps your business running

Every business has ongoing costs like rent, payroll, and supplier payments. 

If you don’t have enough cash available, it doesn’t matter if you’re profitable - you won’t be able to cover these costs.

You need cash to grow your business

If you want to expand, buy equipment, or hire staff, you need cash. 

Profitability doesn’t always mean you have the cash available for growth. Many businesses struggle because their money is tied up in unpaid invoices or stock.

Cash flow helps you handle emergencies

Unexpected costs can happen at any time. 

A sudden repair, a slow sales period, or a late payment from a client can create serious problems if you don’t have enough cash reserves. A positive cash flow helps businesses stay prepared for the unexpected.

Lenders and investors care about cash flow

If you ever need funding, lenders and investors will look at your cash flow forecast to see if your business can handle repayments. Even if you show a profit, poor cash flow could make it harder to get funding.

Cash flow gives you peace of mind

Running a business is stressful enough without constantly worrying about whether you can pay your bills. Strong cash flow helps you plan ahead and focus on growth instead of scrambling to cover shortfalls.

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How to improve cash flow

If you want to avoid cash flow problems, you need a strategy. Here are some top tips to help you stay on top of your finances.

Invoice promptly & reduce late payments

One of the biggest causes of cash flow problems is slow-paying customers. To keep money coming in regularly:

• Send invoices as soon as work is completed.
• Set clear payment terms (e.g., due in 14 days instead of 30).
• Follow up on overdue payments quickly.
• Offer multiple payment methods to make it easier for customers to pay.

Offer incentives for early payments

Encouraging customers to pay early can help bring in cash faster. Consider offering a small discount for early payments or charging a late fee for overdue invoices.

Cut unnecessary expenses

Review your business expenses regularly to see where you can cut costs. Some ways to reduce spending include:

• Negotiating better rates with suppliers.
• Cancelling unused subscriptions or software.
• Reducing energy costs by switching to efficient equipment.

Improve inventory management

If you have too much money tied up in stock, it can hurt your cash flow. Try to balance your inventory so you’re not overstocked but still able to meet customer demand.

Use a cash flow forecast

A cash flow forecast helps you predict when money will come in and go out. This allows you to plan ahead and avoid shortfalls. To create a cash flow forecast:

• List all expected income (sales, payments from clients, etc.).
• List all expenses (rent, wages, loan repayments, etc.).
• Compare your income and expenses to see if you’ll have enough cash each month.

If you notice a future cash gap, you can take steps to fix it before it becomes a problem.

Negotiate better payment terms with suppliers

Just as you want customers to pay you faster, you may be able to extend your payment terms with suppliers. If a supplier allows 60-day payment terms instead of 30, that gives you more time to hold onto cash.

Consider flexible financing options

If your business regularly waits on customer payments, flexible financing solutions like spot invoice finance can help. This allows you to unlock cash from unpaid invoices without taking on traditional debt. 

Instead of waiting 30, 60, or even 90 days for payment, you can get the cash you need right away.

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4 common cash flow mistakes to avoid

Even with good planning, businesses can still run into cash flow problems. Here are some common mistakes and how to avoid them:

1. Confusing profit with cash flow

As we discussed, a profitable business can still run out of cash. Always track your cash flow separately from your profit.

2. Ignoring late payments

Many businesses don’t follow up on overdue invoices because they don’t want to upset customers. However, letting late payments slide can seriously harm your cash flow. Always enforce payment terms.

3. Not keeping a cash reserve

Unexpected expenses happen. Try to set aside a small percentage of income each month to create a safety net for emergencies.

4. Growing too fast without cash reserves

Rapid growth sounds great, but if you don’t have the cash to support it, it can backfire. Always ensure you have enough working capital before scaling up.

Understanding why cash flow is important is essential for any business owner. While profit shows long-term success, cash flow determines whether a business can survive day to day. 

By following cash flow management tips like invoicing promptly, controlling expenses, using a cash flow forecast, and considering flexible funding options like spot invoice finance, you can maintain your business’ financial health and avoid cash flow problems.