Three key metrics that all businesses should monitor are revenue, profit, and cash flow. They are all different metrics to review business performance -- but what is the most important?
Is profit the same as cash flow?
Cash flow is the funds entering and exiting your business bank accounts over time, while profit is the amount of money that remains from your sales revenue after all costs and expenses have been taken out.
For example, you sell a product or service for $100, but that total sales amount is not your net profit. You have to remove out the cost of goods sold along with any expenses associated with shipping. The $100 in sales revenue will go into your bank as part of your cash flow, but the net amount after you pay the expenses is your profit.
Is cash flow more important than profit?
Both profit and cash flow are important for your business. Profit shows you how much you are netting for your sales. If your profit number isn't high enough you could run into cash flow issues when expenses are higher than revenue. While profit is a key metric to monitor, it doesn’t show you the net amount of money moving into and out of your bank account. This cash flow is crucial to keeping your business running. Cash flow is more important to track on a day-to-day basis, as it's cash flow that ensures your business can keep going; however, if you aren't monitoring your profit you will run into cash flow problems down the line.
Is cash flow more important than revenue?
The short answer: yes. Revenue is how money your business makes from the sale of its products or services. It tells you how successful you are at selling your products or services; however, cash flow shows you how much money you have available to invest and operate your business. Without cash in the bank, you could land big orders that you can’t fulfill because you don’t have the cash reserves to pay your employees or suppliers. Because of this cash flow is a more important metric than revenue for your business.
The Trifecta
Cash flow is king; however, all three are critical to the success of your business. Generating revenue keeps the business moving forward. Profits determine how much net money the company makes from those sales. Timing of money coming in and out of the business is critical to ensure that bills can be paid on time.
Are you struggling to understand these metrics and how to improve them for your company? OPEX Collective can help you identify how to improve profitability, drive revenue, and optimize your cash flow.
References:
• Harvard Business School | https://online.hbs.edu/blog/post/cash-flow-vs-profit
• University of Nebraska | https://www.unomaha.edu/nebraska-business-development-center/_files/publications/cash-flow.pdf