It’s the age-old debate: cash flow or profit? While the two are undoubtedly related, they are not the same, and business owners often have to prioritize one over the other. In the long run, a business needs both positive cash flow and profits to stay afloat, but which one should entrepreneurs focus on? Some say that “cash is king,” while others argue that “profit is everything.” But what’s the truth? Let’s take a closer look.

What Is Cash Flow?

Cash flow is the money coming in and going out of a business. It refers to available funds rather than money tied up in uncollected profits or fixed assets. A business needs cash to operate—without it, the owner can’t pay suppliers, staff, utility bills, or purchase inventory. If your business is a car, then cash flow is the gas in the tank—you can’t move forward without it.

There are three main types of cash flow:

• Operating cash flow: The amount of cash generated from regular business operations, such as sales.

• Investing cash flow: Cash earned from investments, such as securities, property, or the sale of assets. During a period of active investment, this number may be negative, but it will turn positive once those investments generate returns.

• Financing cash flow: The net cash generated to finance the company, including debt and dividend payments.

Positive cash flow means more money is coming in than going out, increasing your business’s liquid assets. Negative cash flow means the opposite.

A short period of negative cash flow can be normal when investing in growth, as you have to spend money to generate more liquid assets in the future. However, a sustained period of negative cash flow means your business is running out of fuel, and action is needed.

What Is Profit?

Simply put, profit = revenue - expenses. It’s the money your business has left after deducting expenses from total revenue. Again, there are three main types of profit:

• Gross profit = revenue - cost of goods sold (COGS). This includes variable costs such as materials and labor but not fixed costs like rent.

• Operating profit = revenue - business costs. This figure includes fixed costs but excludes taxes, interest payments on debt, and income from non-core investments.

• Net profit = revenue - all expenses, including taxes and interest.

Understanding these three figures helps identify which costs impact your net profit the most.

Which Is More Important?

Both cash flow and profit are essential for a business’s long-term success, but in the short term, one may take priority over the other. It’s possible to be profitable and still run out of cash—or to have a healthy cash flow but fail to turn a profit. The priority depends on your financial situation.

For example, a business may show a profit each month, but if that money is tied up in assets, it may struggle to pay employees and suppliers, forcing operations to shut down. In this case, cash flow should take priority.

On the other hand, a business may have strong cash flow but remain unprofitable due to high debt. Here, focusing on debt repayment to achieve profitability would be wise.

If a business fails to generate profit over time, cash flow will inevitably suffer. Balancing cash flow and profit is critical—but it can be challenging, especially for busy business owners. That’s why working with a qualified accountant—or even a CFO—can help maintain healthy cash flow while ensuring long-term profitability—without the stress. Need one? Let's talk today!