Cash flow and profitability are related but distinct financial measures. Both are important for any business, and reading this article will help you understand more about each.
The Basics of Cash Flow
According to Inc.com, cash flow is “the amount of available cash within a business at any given time as a result of the inflow and outflow of money.” In other words, cash flow is the money that enters and leaves a company on a regular basis. Money comes in through payment for sales and services, and it leaves in the form of payments to vendors, landlords, employees, and other parties. Maintaining a healthy cash flow is important because it allows a business to pay its bills on time.
The Basics of Profitability
Profitability is determined by how much money a business has after generating revenue and paying expenses. For instance, if a business generates $8 million in revenue but has $9 million in expenses, then it is not profitable. Flip those numbers, and it is profitable. Maintaining and projecting profitability is important because the goal of any business is to make money and because investors will not be interested in unprofitable businesses.
It is possible to undertake profitable activities but receive no immediate cash flow, especially if a client delays payment.
Improving Cash Flow and Profitability
There are several steps you can take to improve both cash flow and profitability. Cash flow can be improved by taking steps like incentivizing clients and customers to pay on time, offering subscription models for goods and services, and carefully negotiating contracts with vendors.
Those steps can also play a role in boosting your company’s profitability, but sustaining it requires sound, long-term planning. For instance, you should carefully analyze projects before taking them on to determine if they will generate enough revenue to be worth it.
If you want to keep learning about the business world, Safe Harbor Commercial Capital’s other blog posts are a great place to look.