Balancing Cash Flow and Profit: Which Matters More for Business Success?

Is Cash More Important Than Profit?

In business, the question often arises - is cash more important than profit? While profit is essential for long-term sustainability and growth, cash flow is crucial for the day-to-day operations of a company.

Profit is the amount of money a company earns after deducting all expenses, while cash flow refers to the movement of money in and out of a business. Having a positive cash flow ensures that a company can meet its immediate financial obligations, such as paying employees and suppliers, without relying on borrowed funds.

However, focusing solely on cash flow without considering profitability can lead to short-term gains at the expense of long-term success. A healthy balance between cash flow and profit is necessary for a business to thrive in the long run.

Ultimately, both cash and profit are important metrics for assessing the financial health of a company. Striking the right balance between the two is key to achieving sustainable growth and success.

Both are equally important to the business. One affects the other. If the cash flow is negative, which means more borrowed working capital, whose interest payments will affect the bottom line [profit]. If the profit margin is not sufficient to sustain the business operation, it means there will be less cash flow, which means more borrowed working capital, whose interest payments will affect the bottom line [profit]. Cash flow needs close monitoring, periodically, say weekly. Profit needs monitoring, say, monthly.

CASH FLOW

Cash flow is the summary statement that shows:
- Money receipts by the organization
- Money payments by the organization
- If the total receipts are greater than the total payments, then cash flow is positive.
- If the total receipts are less than the total payments, then cash flow is negative.

Regards,
Leo Lingham