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Understanding the Difference Between Cash Flow and Profitability

New entrepreneurs are often confused by the jargon that comes along with opening and operating a small business. Two of these terms are cash flow and profitability. On the outside, it seems like these two terms are interchangeable, but they refer to two very different aspects of running a company. So what is the difference between cash flow and profitability?

Let’s Break it Down: What is Cash Flow?

Put simply, cash flow is the money that a company regularly pays and receives. It is made up of the income regularly coming in and the operating expenses going out. These can include daily operational costs, inventory purchases, taxes, and payroll. Cash flow is best described as the money you have on hand and operate with daily.

Having a positive cash flow should be one of the main goals of a company. This allows the company to reinvest in itself, settle debts, and pay other business expenses. A negative cash flow, on the other hand, can be devastating to a company–especially in a post-COVID-19 workspace. Day-to-day operations and the ability to reinvest in itself are often more important to a new business than long-term gains.

Keep in mind that cash flow is important when analyzing income, especially if someone is looking to invest in your business. Investors often pay more attention to your cash flow than your earnings.

What Makes Up a Company’s Profit?

A company’s profit is the revenue left over after deducting all operating expenses. Unlike cash flow, profit is the bigger picture result of a company’s operations over time. A portion of a company’s profit is not made of cash. Profit also includes hard assets (real estate, equipment, buildings, etc.) and accounts receivable.

While businesses that are not profitable may have an uphill climb ahead of them, companies that are profitable but are not cash flow positive have a tough time paying staff, expanding their business, and continuing operations.

These are just two of the dozens of financial terms that are used to make decisions about a business. While small businesses sometimes cannot afford to hire an accountant, a good financial partner is detrimental to a business’s success. Their goals should align with guiding your business and your best needs, not selling you products.

At Falcon National Bank, that’s our view. We want to make banking for your business as simple as possible. We even offer online banking services for your business–something not offered at many financial institutions.  If you’d like more information about our small business banking solutions, contact our friendly and knowledgeable staff.