Cash Flow vs. Profit: 10 Differences You Didn't Know About

February 2020

Your business is growing, your services/goods are in demand, you have a profitable business. How do you know if you have enough cash flow to sustain your small business? Here are 10 things you probably didn't know about Profits vs Cash Flow:

1.What’s the difference between cash flow vs. profit?

-Profit, sometimes called “net income” is the money that is left over after you have met your business financial obligations.

-Cash flow is the money that is moving into and out of a business.

2. Can I have a profitable business with low or no cash flow?

Yes, cash flow issues are one of the primary reasons that a seemingly profitable business fails. Your business may look good on paper, you have plenty of work/sales. But if your customers don’t pay, or pay very late, you may not be able to meet your own financial obligations.

3. How often should I review cash flow for my small business?

Consider tracking it month-by-month for the first two years or so. Eventually you may want to move to tracking quarterly. During times of growth or slow cycles, you may want to look monthly to catch any evolving issues before they become problems.

4. What is Positive Cash Flow?

Positive Cash Flow is the goal, and you achieve it when you have more money coming into your business than what is going out.

5. What is Negative Cash Flow?

Negative Cash Flow is the undesirable situation of having more money going out of your business than you have coming in.

6. What causes Negative cash Flow?

Negative Cash Flow can happen if your business is seasonal, if you’ve had to make a large purchase of equipment or inventory or are growing rapidly. Or your clients/customers may not pay their bills on time or may make partial payments. There are other reasons too, but essentially Cash Flow Negative happens when you don’t have immediate access to the funds you need to meet your basic business financial obligations such as payroll, rent, utilities, vendor payments, etc.

7. Does Negative cash Flow always mean doom for a profitable business?

In some cases, you can make it through a cash flow negative period and come out stronger. And a profitable business may be able to qualify for loans or alternative sources of funding such as Merchant Cash Advances and Invoice Financing/Factoring to stay afloat during a difficult time.

8. What’s the best way to track a small business’ cash flow?

Small business owners should perform a regular cash flow analysis to understand whether they are cash flow positive or negative. You do this by looking at your:

Accounts receivable: what are you owed and when can you realistically expect to receive it?

Accounts payable: what do you owe, and can you meet your obligations?

Shortfalls: Do you owe more than you can pay?

You may be able to track your cash flow on a basic spreadsheet, or you may want to use a small business accounting program that will run the calculations for you. Or you may want to hire an accountant.

9. What are the first signs of an impending cash flow problem?

Always needing to wait for payments from customers before you can pay your own bills, consistently paying your bills late, your accessible funds do not seem to align with your business’ profit and loss statement.

10. How can I quickly fix a cash flow problem?

If your small business frequently experiences a cash flow crisis, take remedial action to address it. You may also want to talk to a financial professional, attend small business financial workshops, or find a mentor.

If you rarely have cash flow concerns, chances are your cash flow problems are caused by bad timing. A short-term loan or line of credit from a bank can be an option that gets you through a rough spot. However, small business bank loans are rarely fast or easy to get, especially if you don’t have an excellent credit history and a detailed business plan.

If you don’t qualify for a bank loan, or need funding within days instead of weeks, consider looking into alternative funding sources. These funders offer options designed to meet the needs of smaller businesses. Business owners don’t need to have perfect credit scores to be approved, alternative lenders are more concerned about your ability to pay now than your past credit history. And the application and approval process typically takes minutes, not months.

One easy way to get the process started is by getting pre-qualified by One Park Financial, a company that focuses on helping owners of small and mid-sized businesses access funding. Connect with a funding expert to discover the options that make sense for you and your business.