Cashflow and Profit: What Matters Most for Business?
Written by Daniel Dubois
Many business owners focus on profit as the ultimate measure of success. While profitability is important, a profitable business can still experience financial stress, miss opportunities, or even fail if it runs out of cash.
The reality is simple: profit tells you whether your business is making money, while cashflow tells you whether you have enough money available to operate.
Put bluntly: "Profit is an opinion. Cash is a fact."
What is Profit?
Profit is the financial result after deducting expenses from revenue.
For example:
Sales revenue: $500,000
Expenses: $450,000
Net profit: $50,000
A profitable business is generating more income than expenses over a given period.
Profit is reported in your Profit and Loss Statement and is an important measure because it demonstrates whether your business model is sustainable in the long term. Profitability supports:
Business growth
Reinvestment in equipment and staff
Debt reduction
Business valuation
Wealth creation for owners
However, profit does not necessarily mean money is sitting in the bank account.
What is Cashflow?
Cashflow measures the actual movement of cash into and out of the business.
It considers:
Customer receipts
Supplier payments
Payroll
Loan repayments
GST and tax payments
Asset purchases
A business can be profitable but have poor cashflow if:
Customers take too long to pay
Supplier balances are significantly reduced
Inventory levels grow
Large tax liabilities are paid down
Debt repayments consume available cash
Significant capital expenditure occurs
Cashflow determines whether the business can:
Pay wages
Pay suppliers
Meet tax obligations
Fund growth
Survive unexpected events
In short, cashflow keeps the doors open.
Why Profit and Cashflow Are Different
The key difference is timing.
Under standard accrual accounting rules, income is often recognised when an invoice is issued, not when cash is received.
Consider this example:
A business issues a $100,000 invoice in June.
The customer pays in September.
The June profit report for the end of financial year may show a healthy profit, however, no cash has been received yet.
If wages, rent and suppliers must be paid in July and August, the business may experience a cash shortage despite reporting strong profits.
How a Profitable Business Can Run Out of Cash
This is one of the most common challenges for growing businesses. Imagine a business that:
Wins several large projects
Employs additional staff
Purchases stock and equipment
Waits 60 days for customers to pay
Profit may be increasing rapidly, yet cash is leaving the business well before it comes back in.
Many growing businesses fail not because they lack profit, but because they run out of working capital.
Which Matters More?
The answer depends on the timeframe.
Short term: Cashflow wins
Without cash:
Employees cannot be paid
Suppliers stop supplying
Loans cannot be serviced
Tax debts accumulate
Strong cashflow is essential for business survival.
Long term: Profit wins
Without profit:
The business cannot create value
Growth becomes difficult
Financing becomes challenging
Owners ultimately destroy wealth
Strong profitability is essential for long-term success.
The most successful businesses achieve both.
Signs Your Cashflow May Need Attention
Watch for these warning signs:
Growing debtor balances
Reliance on overdrafts
Difficulty paying suppliers on time
Increasing ATO payment arrangements
Consistently low bank balances
Regular director loan injections
These often appear long before profitability becomes an issue.
Six Ways to Improve Cashflow
Invoice promptly
Delayed invoicing usually means delayed payment.
Improve debtor collection
Follow up outstanding accounts consistently.
Review payment terms
Align supplier and customer payment terms where possible.
Forecast cashflow
Identify shortages before they occur, and plan accordingly
Monitor inventory levels
Excess stock ties up valuable cash.
Manage Capital expenditure plans for equipment or investments
Ensure these align with available cashflow and/or arrange debt funding as needed.
The Bottom Line
Profit measures performance.
Cashflow measures survival.
A business can survive temporarily without profit, but it cannot survive for long without cash.
The most financially successful businesses monitor both, using profit to measure long-term success and cashflow to ensure they have the resources to operate, grow and take advantage of opportunities as they arise.
Need help understanding your business cashflow? A cashflow forecast alongside your profit and loss results can often reveal risks and opportunities that are not obvious from the financial statements alone. A review with your Salt Accountant can help ensure that growth translates into stronger cash, not just stronger profits.