The Difference Between Profit and Cash Flow Is Often the Difference Between Success and Failure

“Focus on cash flow. I understand the difference between cash flow and profitability, and I’m not recommending that you strive for a lack of profitability. But cash is what keeps the doors open and pays the bills. Paper profits on an accrual accounting basis is of no more than secondary or tertiary importance for a startup. As my mother used to say, “Sales fixes everything.”

Guy Kawasaki, Silicon Valley Entrepreneur

It doesn’t matter what business you’re in and how profitable you are – if you run out of cash, your business will struggle to continue. If you can’t pay suppliers you’ll have nothing to sell, and it’s a quick, vicious circle from there to insolvency.

A viable business needs a reliable and positive cash flow, where the amount of money coming in to the bank account each month at least matches the amount of money going out. This is something that needs to be monitored at every stage of business growth and if your business is currently going through a rough patch, it’s especially critical that you keep a very close eye on your cash.

You can also be a victim of your own success. If your business enjoys a sudden upturn, there is a significant risk that it could run out of cash. This is where cashflow forecasting is essential, it predicts gaps in your finances allowing you to take steps to minimise the effects.

You will be in a much stronger position to negotiate terms, and more likely to secure the short-term cash you need, if you do this well in advance of the anticipated shortfall.