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Business Sensation: Cash flow vis-à-vis Profit

Is cash flow more important than profit?

Modern business terms CASH as the KING or QUEEN to account for the business circumstances. Majorly money depicts the most important and deficient of goods. So, cash resource meets the present and near-term obligations of a business.

Despite the differences, cash flow and profit are important financial metrics for measuring the financial performances of any firm or company. The cash flow shows the movement of money, which is essential for the daily and operational management of the financial operations of the organization. Moreover, cash flow represents the available balance of the business at a certain point in time and helps to form a company's liquidity base. That can also lead to the Net cash flow being either positive or negative. Therefore, positive cash flow marks the inflow of more cash than what is going out and negative cash flow indicates the opposite scenario.

Cash flow can be termed in three aspects: Operating cash flow (the net cash generated from a firm’s regular operations), Investing cash flow (the net cash generated from a company’s investment activities like purchase or sale of securities, capital assets and many more) and Financing cash flow (the net cash generated from a firm’s activities related to finance which can be debt or equity financing or payments of dividends and so on).

Profit simply is the main motivational factor which has a huge financial importance in and for a business. There might be various perspectives like accounting profit, economic profit and other profit. But our concern is on accounting profit that indicates more than a cost: where cost means the total costs of making a product available to the market or the same required for rendering any service. The income statement or profit is a financial statement showing the income and expenses of a company to determine the operating results (grasped profit or loss) over a specific period. The content of the profit and loss account, naturally, consists of revenues and expenditures, with a particular emphasis on their structure.

Profit is also termed in three major types: Gross profit (the profit obtained after deduction of directly associated costs from the selling price), Operating profit (the profit which is generated from the business’s regular operations and does not consider outflows like tax or interests on debt which is termed as EBIT) and Net profit (the net amount of profit after deduction of all direct and indirect payments).

Now, the face-to-face of cash flow and profit determines the Profit as a success indicator while, steady cash flow is needed to maintain a firm’s daily operations.

Besides, the way earning profit does not always ensure adequate liquidity, in the same way having cash flow may not guarantee profitability. For instance, credit sales may ensure profitability but do not generate immediate cash inflow to meet immediate obligations and in the same way financial borrowings may solve the immediate liquidity crunch but it comes with the burden of interest which, in turn, reduces the profit and if, remains unpaid, becomes a liability ultimately.

Thus, profit and cash flow are both significant for a business to be financially stable and sustainable, yet these are not the same phenomena and aspects.