This is a super important distinction, and question. Cash flow and profits are both critical aspects of any business. In order for a business to be important and successful it needs BOTH Cash flow AND profit. It has to generate profits while operating with positive cash flow.
What’s cash flow?
Cash flow is the inflow and outflow of money in a business. It’s necessary to have cash flow in order to pay for operations, taxes, inventory, and to pay employees and operating costs. Positive cash flow is a KEY indicator that a company has liquid assets. Having cash flow enables a company to settle their debts, invest in their business, pay expenses, and provide a buffer against future financial challenges the business might face. Negative cash flow is an indicator that the company’s liquidity is decreasing and its profitability might be going down.
Profit is the surplus – after all the expenses are deducted. Profit is the overall key indicator of a business. It’s the basis on which tax is calculated. There are three main types of profit: gross profit, operating profit, and net profit. Each profit is an indicator of your company performance. It is great when used to look at a company over time, and when comparing the company to other competitors.
What is more important for a business owner?
When determining what’s more important, it depends on the business and the circumstances the business is facing. For example, a business can have profits every month – but if the money is tied up in hard/ illiquid assets, or accounts receivable, then there’s no cash to pay employees. Cash flow is super important because it keeps the business running.
The absense of a profit – even with high cash flow, can mean the business is breaking even/running – but isn’t doing well.