Which is more important Cash Flow or Profit? It’s a question that gets asked often by business owners finding it hard to manage both a positive cash flow and actually making a profit at the end of the month. And there are many variations on this same question… Should I focus more on Cash Flow or Profit…? When is cash flow more important than profit?
But are these the right questions? Here’s my view.
Have you ever met an owner of a business who sets out to build his or her business to NOT make money?? In other words, not make a profit? Of course not.
So that tells us that making a profit is extremely IMPORTANT to every business owner. However, Cash Flow by its very nature becomes extremely URGENT for the business owner.
There is fundamental difference between the financial impacts of both – and it comes down to understanding what is urgent and what is important, and planning for both. Like in all areas of business, we can get caught up in the urgent day to day tasks and pressures (in this case, cash flow), but it is imperative that we take the time to step away and strategize about the things that are important (in this case, profit).
We business owners get to elect our timing around how frequently we measure Profit. Yet when it comes to the business realities of Cash Flow, realities such as payroll, paying the rent or our quarterly BAS…. there are matters of timing around which we have no choice and so the availability of cash shifts from important to urgent.
You may have heard of Stephen Covey’s (7 Habits of Highly Effective people) four quadrants of time management.
Essentially, Cash Flow falls into quadrant 1, it is both urgent and important and must be managed regularly. Profit falls into quadrant 2, it is not urgent but extremely important, and it must be a considered, planned effort. So, the upshot of this is to make sure you allocate time for Q2 thinking in your business, so the systems are in place to make a profit.
Another important point to recognise is that without cash flow a business is more expensive to operate. The more expense the lower our profit. The lower our profit levels the faster our cash dries up. There is also a phenomenun called 'The Cash Gap' that can affect the cash flow in your business enourmously, which you can learn more about here. It is too easily overlooked that our profit is our best source of cash. Almost every other source of cash has a cost attached, which in turn reduces our profit and so the cycle continues.
Even if a business is a not for profit, it must make (or raise) money in order to do the work, provide the goods & deliver the services it offers. The fact it uses all its proceeds to provide those services to its recipients is the balancing act of their model.
So in essence, the answer to the original question of which is more important – Cash Flow or Profit – is this:
They are both as important as each other. Or we could say that Cash Flow is vital while Profit is essential. Whilst acknowledging that, the issue is that timing brings about an urgency for cash that is often not negotiable. Profit is our end game, it’s our big picture and arguably the primary (at least in a financial sense) goal we have. Cash Flow supports us to keep the business running month to month on our way to achieving our end game.
So my advice would be to have the systems in place to manage your cash flow effectively on a day to day basis but ensure you do the planning required at a macro level to know how your business will make a good profit.
Finance is one of the four cornerstones of business along with Operations, Marketing and Leadership. If you could use some help in these areas to build a better business and a better life, contact us for a free strategy session below:
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