Is cash flow the same as profit?

People mix up cash flow and profit a lot. You hear stuff like “cash is king” and think they mean the same thing. But that ain’t it. Cash flow and profit are not the same. They tell you different stuff about how a business is doing.

Cash flow is about the benjamins

Cash flow looks at the money coming in and going out. It’s all about the cold hard cash:

• Money customers pay you
• Money you spend on stuff to run the biz
• Money you use to pay off loans

If more cash comes in than goes out, you got positive cash flow. You’re in the green. But if more cash goes out than comes in, that’s bad news. You’re cash flow negative. In the red.

Profit is what’s left over

Profit is the money you got left after you pay for everything. To figure out profit, you:

1. Add up all the money you made from selling stuff
2. Subtract all the money you spent to make and sell that stuff
3. What’s left is profit (or loss if it’s negative)

Timing is everything

The big diff between cash flow and profit is WHEN you get paid vs. when you mark it in the books.

Say you do a job in January but don’t get paid till February. For cash flow, that money isn’t there in January. You don’t have the cash yet. But for profit, you “book” that money in January when you did the job.

Same deal for expenses. Let’s say you charge stuff on credit in March but don’t pay it off till April. The cash doesn’t leave your pocket in March, so your cash flow is good. But that expense hits your profit in March.

You need both to be healthy

A business needs positive cash flow AND profits to be in good shape.

Positive cash flow keeps the lights on and the doors open. You need cash to pay the bills, your workers, and keep things running day-to-day. If you don’t have the cash, you dead in the water.

Profits are how you make money long-term. They’re what’s left over to grow the biz, pay off debt, and put some cheddar in your pocket. No profits means the business ain’t working.

Why people get confused

It’s easy to mix up cash flow and profit cause they’re both about money. But they tell you different things.

Profit don’t pay the bills

You can make a bunch of sales, have a ton of “profit” on paper, but if the cash ain’t in the bank yet, you can’t pay your bills. Profit don’t matter if you ain’t got the cash.

Cash flow today could mean losses tomorrow

On the flip side, having positive cash flow don’t always mean you making money. You could be getting cash in but spending more than you making. That catches up with you. Today’s cash flow could be tomorrow’s losses.

How to stay on top of both

You gotta keep an eye on cash flow AND profit. They both matter. Here’s how:

Watch the money in and out

Keep tabs on the cash coming in and going out every day, week, and month. Make sure you always got enough in the bank to cover your bills.

Set up a system to track:

• Money from customers
• Money spent on supplies
• Money for taxes, rent, payroll

Check the bottom line

Use your income statement and balance sheet to check if you turning a profit. Do it every month, quarter, and year.

• Add up total sales
• Subtract total expenses
• See what’s left

If it’s positive, great. If not, dig in and figure out why. You spending too much? Not selling enough? Fix what’s broke.

Plan ahead

Look down the road with cash flow forecasts and profit projections. Plan for big expenses and how you gonna cover them.

A cash flow forecast maps out the money in and out so you don’t come up short. Profit projections help you see if the biz is headed in the right direction.