Cash Flow vs. Profitability: What’s the Big Difference?

Every business owner wants to make money. It’s the reason you opened your own venture in the first place. Keeping track of the highs and lows when it comes to your bottom-line can become stressful if you aren’t sure what to monitor. For instance, did you know your business could be in debt and still have a remarkable amount of profitability? How can that be when your cash flow doesn’t seem to be that great? There is a marked difference between being profitable and having funds on hand.


Cash Flow


It seems simple enough: Cash flow is the tracking and measure of money in and out of your business. Keeping tabs on it is a crucial component in maintaining profitability. Money in is all the funds that pass through your business account at any time in a month. These funds are not exclusively operational – from your customers to you. Instead, these funds include every penny that comes in from every source. This includes money in from investors, monthly payouts from a line of credit and other financing sources. The financing portion of cash flow tracking is money received that you will have to pay back. There is also money coming in from investments in your business. These included dividends and other returns on investments your company holds.


Cash flow in measures funds received from three main components: operations, finance and investments. Cash flow out tracks every payment your business account makes. Lease payments, loan payments, inventory supplies, expenditures and bank fees are all tracked in this category.




You may be wondering then how you figure out if your business is turning a profit. The easy method is subtracting the money out from the cash in. If that number is positive, then good news: Your business is profitable! If the number is negative, then you need to figure out a way to turn it around. Your venture is costing you money.


Being able to understand the way your cash flow works will significantly improve your chances of turning a profit. Once you can track where the money comes in and then goes, you may see opportunities to make modifications. For instance, maybe you have money tied up in an investment with a poor return. Reinvesting that money into something else with a higher yield may generate positive cash flow and equal profitability. Knowing how to read financial statements and making adjustments to cash flow handling may make all the difference between success and failure.

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