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How to Tell the Difference: Cash-Flow Positive vs Being Profitable

Posted by Alan Brown on Feb 14, 2018 10:24:21 AM

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Some may think that being cash-flow positive means that your business is automatically profitable. However, that is not true. As a matter of fact, you can be profitable without being cash flow positive—and you can be cash-flow positive without being profitable.

 

Simply put, cash flow is defined as the total amount of money being transferred into and out of a business. On the other hand, profitability is the difference between your overall revenue and expenses.

 

What Does Cash-Flow Positive Mean?

The term “cash-flow” refers to the total amount of cash that is transferred in and out of your business during a specific period of time. Most financial professionals monitor cash flow in terms of daily, weekly, monthly, or yearly periods. In order to be cash-flow positive, you simply must have more money coming in than going out.

 

Calculating Cash-Flow

Calculating cash-flow is simple. First, add up all of your business expenses during a specified period of time. Next, subtract those expenses from the sum of income received. Now, remember, calculations are not based on the debts that you owe but haven't yet paid, or invoices that you have sent out, but haven't yet been paid to you.

 

For example, if a client is billed in January but does not actually pay until March, make sure to mark the receivables for March. Alternatively, if you made a purchase on your business credit card in July, but do not pay the bill until August, make sure to mark those payables for August. Keep in mind that “cash-flow” refers to the total amount of cash that is transferred in and out of your business during a specific period of time.

 

If the Final Number is Positive, You Are Cash-Flow Positive

In order for any business to operate successfully, you must have available funds to pay your employees, purchase inventory and equipment, and cover operating expenses.

 

It’s possible you will occasionally find yourself showing a negative cash-flow at the end of the month. This doesn’t mean it’s time to shut down shop. When you find yourself needing cash a couple months a year, consider a working capital loan to fill the gap.

 

Want to Know How We Come Up With a Loan Offer? Let Us Show You!

 

What is Profitability?

Profitability, on the other hand, looks at the bigger picture. In order to be profitable, the sum of your income must exceed the sum of your debts. A profitable business carries a positive balance on the books after all expenses are paid.

 

Calculating Profitability

Calculating your profitability takes two components into consideration:

1. Gross profit revenue minus the cost of goods sold, and

2. Net profit, or gross profit minus your operating expenses.

 

When calculating profitability, actual cash spent and received is not taken into consideration. Instead, it is based on actual invoiced income and owed debts, whether or not they have or have not been paid. This means that unlike cash-flow calculation, invoices are treated as if they have been fully paid from the moment the invoice is sent. Similarly, any debt placed on credit is applied the day those debts are taken on, as well.

 

What This Means to You

Even though your cash flow and profits are certainly related, they are not completely synonymous. Profitability takes a look at your accounting, giving you a general overview of your business’s finances. Alternatively, cash flow calculations monitor your receivables and payables in real time, providing you with an ongoing understanding of your monthly situation.

 

The Bottom Line

Running a profitable business should be everyone’s end goal. However, it is easier said than done. For more information on how to successfully manage cash flow and business loans, contact us and speak with a loan specialist today!

 

 

Topics: Working Capital Management, Cash Flow Positive, Profitability

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