Is cash flow more important than profit?
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Is cash flow more important than profit?

If you run a small business, you probably spend a lot of time thinking about profit. How much did you make? Is it up on the previous year? What do you need to sell to increase it?

These are the questions lots of small business owners will ponder – but is profit really that important?

With 2022 around the corner, now is the time to review what matters to your business and how you can make the next 12 months some of your most successful yet.

To get you started, we’ve taken a look at why cash flow could be key, and debunked some of the most common myths about profit.

Turnover is vanity, profit is sanity – and cash is reality

It’s a classic business cliché, but this saying rings true for many small businesses. Turnover for some can amount to six or seven figures, but this is the money made before subtracting costs and expenses.

A business with a turnover of £5 million a year sounds like a success, but for example, if staff salary, rent, and other costs come up to £4.5 million, it is in fact making a much less in comparison to turnover.

This amount is of course the profit, which is what you’re making once business costs and expenses have been subtracted from turnover. Profit allows you to invest in your business, from hiring new staff to purchasing new equipment to help you run more efficiently.

For most business owners, making a profit is the incentive to set up in the first place. It’s the key to developing your business and ultimately reaping bigger financial rewards, as without profit you’ll only be working to cover monthly costs.

This is known as breaking even, and it’s why cash flow can be considered the most important factor of them all. Profit is a vital part of planning for the future, but the here and now of your business can only be decided by cash.

Acquiring stock, paying staff wages and meeting monthly bills can only be done with enough funds in the bank, without which the business could fail quickly.  A healthy cash flow gives you choice on where to spend, the ability to be flexible, and ultimately the means to maintain your business.

Profit can’t be bought, but small business cash flow can

A distinct difference between cash flow and profit is that the former can be brought into your business, whereas the latter can only be created by the business’ performance itself.

When cash flow is a problem, your business is under threat, so you’ll need to take action urgently. Fortunately, there are options to overcome it, including:

All of these options come with their own steps, with the process for securing late payments often lengthy, and the need to be wary of not running up an expensive credit card bill you’d struggle to pay off. Most small business loans require an eligibility check, but the good news is a lack of profit won’t necessarily impact your application.

Small business loans can offer immediate ways to boost your cash flow. Find out how much money your SME can raise with our Business Loan Calculator.

Investors and partners will focus on cash flow over profit

There may come a stage where you decide to bring external investment into the business, or appoint experienced personnel as business partners. During this process, cash flow takes precedence over profit. The whole picture of your business will be scrutinised, with particular focus on cash flow as this is the figure that highlights the reality of its performance.

Remember that businesses with healthy cash flow but no profit can still become profitable over time, but those without may struggle to continue trading, regardless of the profit they’ve made.

A cash flow focus keeps businesses in the black

Prioritising cash flow over profit can prevent future problems for your business. Having a shortage of cash could mean late payments to suppliers, impacting your business’ reputation and potentially its credit rating.

A close eye on cash flow also reduces your chance of debt, as you’ll be satisfying invoices on time, leaving you with more time to focus on growing your small business.

Positive cash flow leads to profit

When your business is doing well, that means there’s enough money in the bank to buy and sell in line with your rate of sales. As more orders come through, you’ll need cash to ensure the right level of stock, and in turn surplus funds will flow through the business, making a profit at the end of the week, month and year.

If you’re a small business owner looking to make more money in 2022, focusing on cash flow from the outset is the best way to create a sustainable profit for a positive, long-term impact on business growth and development.

Get support with a quick small business loan

If your forecast shows cash flow could struggle this Christmas, you still have options to secure funding during this holiday period.

Once you’ve received funding, you have the freedom to fund whatever is needed for your online shop, from investing in new systems to new stock.

Business loans from Capify offer a range of alternative finance options which could potentially help a small business with cash flow issues.

You can apply for a loan for your business from Capify in several different ways. You might want to start with our simple online application and get an instant decision on your eligibility. Or, if you’d prefer to talk to a member of our team, we’d be happy to guide you through the process. Give us a call today on 0800 151 0980.