There are many financial metrics you want to understand as a business owner. The better you understand what’s going on with your capital, the better equipped you are to nudge your company in the right direction. That way, you can reach your goals and enjoy continued success and growth. Two of the most important financial terms are cash flow and profitability. What do these terms mean?
What Is Cash Flow?
Put simply, your company’s cash flow refers to the capital that is coming in and going out of your monthly ledger. It’s a ratio that determines how much money you’re making versus how much you’re spending. You can check your cash flow at any time of the month to see how much working capital you have available for your needs.
What Are Profits?
Profitability has to do with your overall revenue compared to your expenses. It looks at whether you’re selling enough to cover your costs and have money over and above at the end of the month. The goal is to have a profitable business that always generates more revenue than what’s required to run it.
Why Is Your Cash Flow Important?
If your business has cash flow problems — which is surprisingly common in many industries — it means that you have trouble keeping liquid capital available to use during the month. You may be selling more than enough to cover your expenses in terms of revenue, but that money may not be available at the right time.
For example, imagine a manufacturer that sells $100,000 worth of finished goods. The raw materials cost $25,000. On paper, the manufacturing company is poised to make a huge profit. What happens, though, if the customer who purchased the goods requires three-to-six months to make payment? Even though the sale is already finished and billed, the capital isn’t actually in the manufacturer’s hands yet.
This becomes a big problem if the suppliers require the manufacturer to pay for raw materials in 30 or 60 days. To avoid problems, the company would need an alternative source of financing to cover the cost until the money from the sale comes through.
Which Is More Important: Cash Flow or Profitability?
Both of these financial terms are vital. One without the other is a sign of poor financial health. Fortunately, with financing, it’s possible to balance things out. Investing in your business matters so you can continue growing revenue and profitability, which helps your cash flow.
Abundant Wealth Financial offers cash flow solutions to ensure businesses can cover expenses and build up capital for growth projects. Contact our offices today to learn more.