Profit or cash – what is more important and why?

Profit or cash – what is more important and why?

Profit or cash – what is more important and why?

This is a question every entrepreneur should know the answer to.

The answer is that cash is more important in the short-term but both are as important in the long-term.

In the short-term, you can make losses and as long as shareholders have put in sufficient cash into the business, it can survive on the cash until it starts to make a profit to generate new cash. A perfect example of this is Amazon, which did not make profits for years but kept raising funds from shareholders until it made profits.

However, just because you make a profit does not mean that you don’t have to worry about cash – see my blog on ‘Can you make profits and still go bust?

The confusion arises when you think that profits mean cash!

Profit is what’s left after deducting expenses, salaries and taxes from revenue and does not equate to cash until your customers have paid you before you pay all your expenses and salaries. Forecasting, planning and managing your cash flows is essential to staying in business without running out of cash. My blog on managing working capital and tips on managing cash shows how you can manage cash flows effectively.

You can make big profits but if your one large customer fails to pay you on time or you don’t forecast and plan your cash flows effectively, you will be in trouble.

The saying ‘cash is king’ is very apt and every business needs cash to run the business.

However, to stay in business, you not only need to manage your cash effectively but have to make profits consistently.

 

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