Often a business’s cash flow is confused with their profit. The difference between them is important to note as even if a business has positive cash flow, they could be making a loss, or alternatively they could be making a profit but fail due to negative cash flow.
In brief cash flow is the movement of money into and out of a business. Money can come in from sales or client fees and move out in the form of purchases, wages and expenses. This is where the difference between it and profit comes in. Even if a profit exists from sales completed but owed revenues have not been collected there won’t be sufficient finances to keep the business afloat. Without acknowledging this your business may fail.
What does this mean for your business?
Understanding how cash flow affects your business will help you in acknowledging its importance. There are both long and short term implications for your business when it comes to cash flow. There are both regular outgoings and unusual or once off costs for your business.
1. Employee relationship
It is essential that you have sufficient cash flow to pay all salaries and employer’s taxes. By regularly having trouble covering salaries you will damage your relationship with your employees. This can lead to a high level of staff turnover which can affect the growth of your business.
2. Business analysis
When making business decisions about your business’ finance cash flow should be your main consideration. The lifespan of your business depends on your cash flow, not how much profit your business makes.
3. Customer relationship
When it comes to your suppliers they will expect payments on time. Failing to make these payments in a timely manner will have massive consequences for your business as it may prevent your business from sourcing all that it needs to operate. Without these supplies you will fail to fulfill orders thus damaging the long term performance of your business. This will affect relationships with customers and they may find alternative companies with similar offerings.
For any business to grow knowing the difference between cash flow and profit is critical. If you’re confident that your business will grow then managing cash flow will be the main aspect of that growth as it considers everything related to growth. We know that cash flow is hugely important so we have created a guide all about managing, improving and measuring cash flow, as well as its benefits!
