Every business starts with the primary aim of generating profit. However, to achieve that goal of yours, the company needs financing. With this simple explanation, it’s not hard to differentiate between cash and profit. Let me explain in simpler words:
Cash flow refers to the total flow of cash going in and out of your organization and keeps your business operations up and running.
When your company receives more funding than the payments, your business has a positive cash flow. On the flip side, if a company had paid more and received less, it had a negative cash flow.
Profit refers to how productive your business was and how much revenue it was able to generate in a given period. It is a significant indicator of the success of your business. You may describe profit as the amount received by deducting total operating expenses from the revenue generated during a fiscal year.
Both cash and profit are like blood to an organization. Without cash, the business activities will come to a halt, whereas a business incapable of generating profit will lose to competitors in the long run. Frankly, there is no reason for a business to exist that cannot or does not make a profit.
So, What’s The Difference Between Cash and Profit?
Grasping the difference between cash and profit is critical for ensuring positive growth and progress. You can see the major line of distinction through the following point:
Your investment circulating in the market either in the form of cash or invoice finance, giving a company an overview of its financial status is cash. On the contrary, profit is the amount a business earned after excluding all the necessary costs and expenses.
Here, let me tell you something. A business, even with a negative cash flow, can generate a reasonable profit. So, a lot of cash going in and out does not mean a company is making exciting profits.
Let’s Learn Through Example and See the Best Solution
Imagine you are a big goods manufacturing firm. You received a huge order for producing certain goods but with no cash in your hand to finish the order. For this, you either decided to go for a loan or issue stock to raise capital.
For issuing stock, you have to sell part of your corporation, making you lose control over your business. On the other hand, borrowing a loan means an added expense of interest on your monthly payments.
Though both of these options could work in some situations, why not go for an effective and efficient solution that is invoice financing?
Invoice financing or invoice discounting is simply accounts receivable financing. In this, companies sell their unpaid invoices/ accounts receivable to finance provider(s) and get the amount they need. As a fee for borrowing money, businesses pay a percentage of the invoice amount to the finance provider(s).
Not only this alternative funding solution will facilitate your late payments, but it will also allow you to recover the money that your business customers had tied up, and that could otherwise be used to invest or expand a company’s operations.
Which One Should You Prefer: Cash vs Profit?
Preferring one over the other may not give you a clear picture of your business. Profit is undoubtedly the ultimate goal for any business, be it small scale or large scale. However, to increase your sales margin and ensure the smooth functioning of your day-to-day operations, you need proper funding and consistent cash going in and out of your company.
To help your business move forward and become a successful enterprise, profit and constant cash flow are both needed. They are like water(cash) and food(profit) to a body(business). Feeling short on any of them could make your body (business) drop its performance.
Give your business options with Fifo Capital.
Find out how Fifo Capital can help to improve your cash flow!
Speak to our Team, call 01 691 7515.
P.S. To be eligible for our Invoice Finance service, your business must be a limited company that serves and invoice businesses on credit terms.