Positive Cash Flow Is Not The Same As Profit 

(2 minute read)

If you are self-employed, or a solopreneur, you need to be ever mindful of a fundamental principle: positive cash flow is not the same as profit. While both are essential, they each play unique roles. Some of you may have understood this before you launched your business, while others may have learned it the hard way. Regardless, the take home message is that it is not enough just to familiarize yourself with this principle, you must also incorporate it into your business practice as an essential metric. Failure to do so will significantly limit your ability to make informed decisions about the current state of your business and its future growth potential.

Cash flow, simply defined, is the amount of money which flows in and out of your business during a specific interval, such as during the month, quarter or year. It includes the money that comes in the door as income, as well as the money that goes out the door to cover operational expenses, payroll, supplies, vendors, equipment leases, taxes, etc. If you have more money coming in the door, than going out, then you have a positive cash flow. If you have more money going out the door, than coming in, then you have a negative cash flow. 

Profit, on the other hand, is the amount of money that remains after your costs and expenses have been deducted from your income. For most small business owners, profit is the primary objective. It is typically a sign that your business is sustainable. Nevertheless, it is worth noting that you can have poor cash flow, during a measured interval of time, and still be profitable. Likewise, you can maintain a positive cash flow, during a measured interval, and not be profitable. 

The intricacies of cash flow can be quite technical, and are a function of business specific factors, such as how frequently you get paid, form of payment (point of sale versus monthly or quarterly billing cycles), seasonal ebbs and flows, the unpredictability of variable expenses, infusion of new investment capital, etc. If you don't have a firm grasp of your cash flow it is nearly impossible to accurately determine how much should be dedicated to occasional expenditures such as owner profit, re-investment, debt reduction and developing new services. Additionally, the monitoring of cash flow can telegraph invaluable information, such as how much longer you can sustain losses and at what point you are ready to expand. For example, if a small business with a positive cash flow grows too quickly the cash flow can be detrimentally impacted, transforming the business from financially stable to fragile in a relatively short time. 

Because cash flow is the lifeblood of small business, it would be wise to give it the attention it deserves. However, most solopreneurs or small business owners have their hands full with day to day operations and providing essential services to their customers or clients. In other words, they did not launch their businesses in order to spend valuable time and energy mastering cash flow intricacies or the principles of accounting.

The good news is that there are cash flow experts who have developed inexpensive software and apps which focus like a laser on the small business cash flow essentials. These simple cash flow tools provide solopreneurs and self employed professionals with peace of mind and free up valuable time and energy to allow them to do their thing. 

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