Cash Flow vs. Profit: How They’re Different and Why It Matters
Turning a profit is often the #1 goal for business owners - but without healthy cash flow, even profitable businesses can struggle to survive. In fact, many businesses close not because they aren’t profitable, but because they run out of cash.
So, what’s the real difference between cash flow and profit, and which one matters more right now?
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- How Businesses Can Establish Credit in 7 Simple Steps
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What is Profit?
Profit is what’s left after your business covers all its expenses. It comes in two forms: gross profit and net profit.
Gross Profit
Your gross profit is what’s left after subtracting your Cost of Goods Sold (COGS) from your revenue.
Example: You own a pizza shop. In December, you made $30K in sales. Your supplies (COGS) cost you $10K.
Gross profit = $20K
Formula: Gross profit = Revenue - Cost of Goods Sold
This number doesn’t include things like payroll, rent, or marketing. Those come next.
Net Profit
Your net profit is what’s left after subtracting your operating expenses from your gross profit.
Example continued: Your gross profit is $20K, but your operating expenses (salaries, rent, etc.) are $12K.
Net profit = $8K
Formula: Net profit (or net income) = Gross profit - operating expenses.
📌 Quick Tip: "Net" is what you get.
Understanding both gross and net profit helps you track performance and prepare for taxes, loans, or investor conversations.
What is Cash Flow?
Profit gives you a snapshot. Cash flow is the pulse.
Cash flow measures how much money is actually moving into and out of your business at any given time. Whether through sales, bills, equipment purchases, or client payments.
- Cash in: Customer payments, loans, grants
- Cash out: Rent, supplies, debt, payroll
A positive cash flow means you’re bringing in more than you’re spending, a negative cash flow means more money is going out than coming in.
Even profitable businesses can experience cash crunches if customers pay late or large expenses come up unexpectedly.
How to Calculate Cash Flow
There are two main accounting methods:
- Accrual method of accounting: Records transactions when they’re incurred (even if cash hasn’t moved yet)
- Cash basis accounting: Records transactions when the money is actually received or paid
Example: You send an invoice in May, but the client pays in July.
- Accrual: You recognize income in May
- Cash basis: You recognize income in July
To calculate your cash flow:
- Start with your beginning cash balance
- Add all income received this month
- Subtract all expenses paid this month
→ The result tells you whether you had positive or negative cash flow
What’s the Difference Between Cash Flow and Profit?
The difference may be clear by now, but here's the difference in a nutshell:
- Profit refers to the net income of a business at the end of an accounting period.
- Cash flow refers to the amount of money coming in and going out of a business at any given time.
A business can be profitable but have poor cash flow (especially if customers are slow to pay). Or have strong cash flow (maybe from a loan or grant) but still be unprofitable if costs outweigh revenue.
Which One is More Important to Your Business?
You need both to build a sustainable business.
- Cash flow is essential for day-to-day operations
- Profit is key for long-term success and investment readiness
Focusing on cash flow helps you pay rent, make payroll, and stay nimble. Even in uncertain times.
How Can You Improve Your Cash Flow?
Increasing sales is the obvious route, but here are other ways to stay ahead:
- Reduce unnecessary expenses
- Shorten payment terms or offer early-pay incentives
- Renegotiate vendor contracts
- Use a business line of credit for flexibility
A line of credit works like a financial safety net. Borrow what you need, repay it, and reuse it.
Need Help Managing Your Business Finances?
Whether you're just starting out or scaling fast, Skip can help:
- Track funding with My Funding
- Use tools like Grants Vault for smarter applications
Have questions or need help? Book a 1-on-1 call with a Skip expert