What Is the Difference Between Cash Flow and Profitability

As the owner of a small business, you probably have heard the term cash flow before. Of course, you may not know what this term means or how it differs from similar concepts like profitability. In order to help you find the right answers, take a look at this information on what separates the two concepts.

Profit

First, take a look at profit. When people hear the word profit, most assume it means that a business is doing well. Usually, a business does not see a profit for the first few years of being open. This makes the goal of earning a profit highly desirable for most companies. Of course, it is not that simple. In most cases, a business making a profit also needs to make a distinction between the money coming in and the available capital the business has.

Capital

The difference between profit and capital is in how the money is spent. Profit often is used for personal gain. The owner of the business can use the money he or she makes a profit in a number of ways. Capital, on the other hand, is the money being used for the purpose of running or bettering the business. This cash flow is crucial for a company to maintain success and it is an area many business owners overlook when budgeting.

Your capital is what you need to use to pay off any debts your company might have. If you owe money to lenders, then you really don’t have the profit you might believe you have.

Generating Capital

A big issue many business owners face is knowing how to generate capital. While it can seem confusing, there are simple ways to improve the flow of finances. For one, you want to make sure you aren’t wasting money anywhere in your business. Beyond this, initiatives focused on raising capital have been known to do wonders for the efforts of startups and small businesses. Some companies also find that loans and other forms of financing can be useful for improving capital. Look into how services like factoring or SBA loans might be able to boost your budget.

Understanding the difference between your profit and your available cash flow can make a huge difference in the overall success of your company. Give yourself time to research all of your options for improving your working capital and see how you can get your business ahead and have a better understanding of your finances in no time.

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