Cash Flow Vs. Profit: What's the Difference (& Why It Matters) | DigitalOcean (2024)

Cash flow and profit are often used interchangeably, but they don’t mean the same thing. Each term describes important elements of your startup that deserve your time and attention.

Not sure about the differences between cash flow vs. profit? Don’t worry—you’re not alone. Below, we’ll cover all the nitty-gritty details and nuances you need to know to better understand (and use) these important business metrics.

What is cash flow?

Cash flow refers to the money moving in and out of your business during a defined period of time. Positive cash flow means more money flowed in than out, and negative cash flow means more money flowed out than in.

Let’s look at a basic cash flow example:

You bought a candy bar today for $1, but you couldn’t manage to sell it before the end of the day. One dollar flowed out of your business today, but nothing flowed in—that means you had a negative cash flow for the day.

Now, let’s say you sell the candy bar a few days later for $2. One dollar flowed out of your business during the week, but $2 flowed in when you sold the bar—that means you had a positive cash flow for the week.

An important distinction for cash flow is that it refers to money flowing in and out of your business, and that’s different from revenue and expenses. You might make a sale today but not receive the actual payment for another 30 days—that money isn’t flowing into your business until it lands in your hand or your bank account. The same goes for expenses: you might purchase a product or service but not have to pay for it immediately—the money only flows out of your business when the money actually leaves your account or wallet.

Let’s look at an example of this action:

You spent $100 during January on marketing and advertising your new product. You finally land a customer at the end of the month, and they agree to purchase $1,000 worth of inventory. You send them the products with an invoice for a 30-payment deadline, but they don’t pay the invoice until February—that means you experienced negative cash flow in January because you had money flowing out of the business but not into it.

Cash flow statement

You report your cash flow in the cash flow statement. This financial document explains your startup’s exchange of cash during a specific period of time. The period of time element is important here. You don’t measure cash flow at any given time—it’s a measure of the movement of cash over a month, quarter, or year.

This is different from other financial documents, such as a balance sheet. A balance sheet measures your company’s assets, liabilities, and equity as of a specific date—it’s not measuring the movement of cash over time (unless you’re comparing multiple balance sheets to each other). It provides a snapshot.

What is profit?

Profit (also known as net income) refers to the amount of money remaining from your sales revenue after you’ve subtracted all your costs. A profit means you have revenue remaining after subtracting your costs, while a loss means your costs exceeded your revenue.

Profit is typically reported as the following:

  • Gross Profit: Profits kept after costs _directly associated _with providing the good and service are deducted. For example, you might subtract inventory, sales commission, and delivery fees from your revenue to find your gross profit.
  • Net Profit: Profits kept after all other costs are deducted. This would include subtracting rent, payroll, taxes, and the like.

Profitable startups have leftover capital to use for various purposes:

  • Building the business: Reinvest your funds into growing your startup—that might be hiring additional talent, upgrading your products, or expanding your marketing campaigns.
  • Distributing dividends: Pass along profits to owners and shareholders in the form of dividends.
  • Expanding revenue sources: Look for new ways to make money, especially in light of an economic recession. Consider new product lines or services you can offer so that you don’t have all your eggs in one basket.
  • Investing in infrastructure: Consider upgrading your hardware, software, or workspaces. Anticipate your demands for the future, and see if you can get ahead of the curve with infrastructure updates now.
  • Paying off long-term debt: Cut down on your monthly bills by paying off long-term debt. This will save you interest in the long run and give you room for other financing opportunities down the road.

While every business’s end goal is profitability, it’s not always quick or easy to achieve. The battle for profitability can often slow growth and lead to missed opportunities. It takes money to make money, and sometimes that means you’ll need to experience months or years of losses to set the stage for long-term profitability.

Income statement

Businesses report their profits in their income statement—also known as a profit and loss statement (P&L). This financial document explains your startup’s revenue and expenses, thus explaining the gains or losses. Like with a cash flow statement, it’s measured over a period of time and not taken as a snapshot.

Cash flow vs. profit: what’s the difference?

While you’ve probably noticed a few differences from looking at the definitions above, here’s a quick overview of cash flow vs. profits:

  • Indication: Cash flow shows how much money moves in and out of your business, while profit illustrates how much money is left over after you’ve paid all your expenses.
  • Statement: Cash flow is reported on the cash flow statement, and profits can be found in the income statement.
  • Simultaneous: It’s possible for a business to be profitable and have a negative cash flow at the same time. It’s also possible for a business to have positive cash flow and no profits.

Is cash flow or profit more important?

Neither cash flow nor profit is more important than the other—both illustrate different facts and information about your startup. There’s rarely a single golden metric for understanding the health of a startup. Usually, it requires context and a handful of financial statements to truly understand the business’s situation and potential.

For example, heading toward an economic recession, investors might be more interested in your cash flow rather than your current profitability. While you might be making profits now, they likely want to see your potential to make profits later when unforeseen circ*mstances hit your business.

Keep an eye on both metrics (and, really, dozens of others) to keep a good pulse on your startup’s financial health. Being proactive about reviewing (and optimizing) these metrics will ensure you’re never surprised by investor or analyst conversations—you’ll always be ready to tackle questions and defend your business.

Invest in your startup with DigitalOcean

Whether you’re focused on cash flow or profits, you need affordable software that scales with your business. While it’s sometimes necessary to make large upfront payments to grow your business, we believe you should pay for what you get.

DigitalOcean provides cloud hosting services and infrastructure as a service (IaaS). Our pricing scales with your business, which means you start small, pay small.

Take a look at our cloud solutions and pricing to see which makes the most sense for your startup. Need help? Talk to our sales team—they’ll help you find the right mix of cloud solutions to meet your startup’s unique needs.

Cash Flow Vs. Profit: What's the Difference (& Why It Matters) | DigitalOcean (2024)

FAQs

Cash Flow Vs. Profit: What's the Difference (& Why It Matters) | DigitalOcean? ›

Key Differences

What is more important cash flow or profit? ›

There are a couple of reasons why cash flows are a better indicator of a company's financial health. Profit figures are easier to manipulate because they include non-cash line items such as depreciation ex- penses or goodwill write-offs.

What is the difference between revenue and cash flow and why is the distinction so important? ›

Key Takeaways. Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company's sales and marketing, whereas cash flow is more of a liquidity indicator.

How can you be cash flow positive but not profitable? ›

Sometimes, a business can be cash-flow positive but may not be profitable For instance, if a business operates at a net loss, borrowing cash helps create a positive cash flow. Similarly, when it sells a significant asset to raise capital, the money it receives is an inflow of cash.

How profits and cash flow are different in very basic terms? ›

The key difference between cash flow and profit is while profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business.

Why is cash flow most important? ›

Why is cash flow important? Cash flow is important because it enables you to meet your existing financial obligations as well as plan for the future. Yet, cash flow is a common challenge among small businesses.

Why is cash flow lower than profit? ›

Your company is buying equipment, products, and other long-term assets with cash (Cash Flows From Investments). As a growing small business, you are likely to be spending more than you have in profits because the company is investing in long-term assets to fuel its expansion.

Is cash flow the same as profit and loss? ›

Both concepts are important parts of a successful financial planning. Cash flow is important because it shows how much money a business has available to meet its obligations. Profit and loss, on the other hand, is a measure of whether a business is making money or not.

Does cash flow include owners salary? ›

Pricing a business for sale requires evaluating its cash flow—another name for a business's earnings before interest, taxes, depreciation, amortization and owner's compensation are subtracted.

Can a company generate profit but have a negative cash flow? ›

Yes, a profitable company can have negative cash flow. Negative cash flow is not necessarily a bad thing, as long as it's not chronic or long-term. A single quarter of negative cash flow may mean an unusual expense or a delay in receipts for that period. Or, it could mean an investment in the company's future growth.

Can a profitable business fail because of cash flow? ›

While it may seem counter-intuitive, the answer is yes. Cash flow is not the same as revenue. Even if a business has a great market share and is turning a profit, it can still fail due to negative cash flow.

Can a company be profitable and still have a cash flow problem? ›

Even profitable businesses can experience issues with cash flow, and in fact, businesses that are growing very quickly are particularly susceptible to this issue. That's because they can spend heavily to fund their continued growth without having the revenues to sustain such a high level of spending.

What are the 3 types of cash flows? ›

There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company's cash flow statement.

What is cash flow in simple terms? ›

Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows.

Is cash flow the most important financial statement? ›

Cash flow from operations

Similarly, the depreciation of owned assets is added back to net income, as this expense is not a cash outflow. Analysts often look to cash flow from operations as the most important measure of performance, as it's the most transparent way to gauge the health of the underlying business.

Does cash flow affect profit? ›

Although closely related, cash flow and profitability are different. Cash flow represents the cash inflows and outflows from the business. When cash outflows are subtracted from cash inflows the result is net cash flow. Profitability represents the income and expenses of the business.

Do profits always equal cash flow? ›

Profit and cash flow are both important elements of a healthy, growing business, but they are not the same thing. To manage your business, you must understand the difference between making money and managing money.

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