Cash Flow vs Profit: Understanding the Difference That Could Save Your Business
When it comes to business success, cash flow and profit are often used interchangeably, but they’re not the same thing. Understanding the difference between the two could be what saves your business from running into serious financial trouble.
At Bizdom, we regularly see successful Kiwi businesses that are profitable on paper, yet still struggle to pay bills or meet payroll. The key lies in understanding how cash flow and profit work, and how to manage both effectively.
What’s the Difference Between Cash Flow and Profit?
Profit is the money your business makes after all expenses have been deducted from your revenue. It’s what shows up at the bottom of your profit and loss statement, and it’s an important indicator of long-term business performance.
Cash flow, on the other hand, tracks the actual movement of money in and out of your business. It’s the lifeblood that keeps your business running day-to-day. Positive cash flow means you have enough money available to cover bills, wages, and other short-term commitments.
In simple terms:
Profit is an accounting concept.
Cash flow is a real-world measure of your financial health.
Why a Profitable Business Can Still Run Out of Cash
It’s entirely possible to make a profit and still face a cash crisis. This can happen for several reasons:
Slow-paying customers: You’ve made sales, but if clients are slow to pay, your cash flow suffers.
Overstocking: Tying up too much money in inventory can limit your available cash.
Over-investing in assets: Purchasing new equipment or vehicles outright can drain cash reserves.
Tax timing: Profit doesn’t consider when tax payments are due, but your bank balance certainly does.
Without healthy cash flow management, even profitable businesses can find themselves struggling to stay afloat.
How to Improve Your Cash Flow
Here are a few practical steps to strengthen your cash position:
Invoice promptly: Don’t delay sending invoices. The sooner clients receive them, the sooner you get paid.
Tighten credit terms: Consider shorter payment periods or offering small discounts for early payment.
Forecast regularly: Use cash flow forecasting tools to predict shortfalls and plan.
Lease rather than buy: Preserve cash by spreading costs over time instead of large one-off payments.
Monitor spending: Review your regular expenses to ensure they align with your business priorities.
Why Understanding the Difference Matters
Many businesses fail not because they aren’t profitable, but because they run out of cash. Recognising the difference between cash flow and profit allows you to make better financial decisions, from when to hire new staff, to when it’s safe to expand or invest.
By managing both effectively, you’re not just surviving, you’re setting your business up for sustainable growth.
Final Thoughts
Cash flow and profit are both vital to your business success, but they tell different stories. Profit shows how your business is performing overall, while cash flow shows whether you can keep the lights on tomorrow.
If you’re unsure how healthy your cash flow really is, it might be time to get expert advice.
At Bizdom, we help Kiwi business owners understand their numbers, so they can make smarter, more confident decisions.
Get in touch today to talk about how we can help you strengthen your cash flow, protect your profit, and grow with confidence.