Cash flow and profit are both important financial metrics in business, and it isn’t uncommon for those new to the world of finance and accounting to occasionally confuse the two terms. But cash flow and profit are not the same things, and it’s critical to understand the difference between them to make key decisions regarding a business’s performance and financial health.
For investors, understanding the difference between profit and cash flow can make it easier to know whether a profitable company is actually a good investment based on its ability to remain solvent in times of economic crisis. For entrepreneurs and business owners, understanding the relationship between the terms can inform important business decisions, including the best way to pursue growth.
What is Cash Flow?
Cash is constantly moving into and out of a business. When a retailer purchases inventory, for example, money flows out of the business toward its suppliers. When that same retailer sells something from inventory, cash flows into the business from its customers. When the retailer pays its workers or utility bills, cash flows out of the business, toward its debtors. When the retailer collects a monthly installment on a purchase that a customer financed 18 months ago, cash flows into the business. Continue reading “Cash Flow vs. Profit: What’s the Difference?”