Why Being Cash Flow Positive Isn’t the Same as Being Profitable

If you have plenty of cash on hand to run day-to-day operations, you probably feel quite comfortable about your company’s future. After all, many businesses experience issues with cash flow.

So if you’re cash flow positive, you may want to jump for joy. By all means, do so — but that doesn’t mean you should become complacent. Just because you’re cash flow positive doesn’t mean you’re profitable.

Let’s explore the difference between being cash flow positive and profitable, and take a look at what steps small business owners can take to become profitable.


How does being cash flow positive differ from profitability?

Cash flow refers to the total amount of money that’s coming into and leaving your business. Being cash flow positive simply means your company has more money arriving than going out.

But isn’t that the same as being profitable?

Being cash flow positive and profitable are interconnected. Profitability is measured by income and expenses and gives an idea of a company’s financial health. When income exceeds all expenses, you’re profitable.

That sounds similar to cash flow, but there is a key difference. You can be cash flow positive but not profitable, and you can be profitable but not cash flow positive.

Consider this scenario:

  • Your total income last year was $500,000. Your total expenses, including inventory and payroll, came out to $450,000. Congratulations! Your company achieved a $50,000 profit. You’re profitable.
  • But only if you use accrual accounting, which is the recording of income and expenses incurred rather than received or sent. Unfortunately, a major client still owes you $60,000 from an unpaid invoice.
  • That means your cash flow for the year is $440,000. Considering your expenses were $450,000, that means you’re actually in negative cash flow territory because you’re short $10,000. This means you’re profitable on an accrual basis but not a cash basis. But you’re cash flow negative from both perspectives.


Your daily focus should be on cash flow

Profitability gives a big, general overview of your company’s finances. For profitability, it’s important to go beyond gross profit, which is revenue minus the cost of goods sold. You must look at net profit, which is your gross profit minus your operating expenses.

If you’re achieving a net profit each month, then your business model is working. This is a sign you can have success as a small business owner.

However, profitability can be a bit misleading in terms of survival. As noted in the example above, it doesn’t factor in whether real money is coming into the company. Cash flow tracks your receivables and payables in real time.

Positive cash flow means you have money available to run your business. Poor cash flow will shut your business down faster than anything else, as you won’t have the funds on hand to capture growth opportunities, pay for operating expenses, cover bills, etc. You absolutely must ensure you’re cash flow positive. For seasonal businesses, cash flow is all the more crucial.

So, while being profitable should be a big-picture goal for your business, staying cash flow positive is what will keep things running smoothly in the short term. Pay attention to both, but focus on cash flow daily. It’s what can ensure your business can keep going.


How you can become cash flow positive

First, assess your situation. Calculate your cash coming in and your cash going out by following these steps:

  1. Calculate the value of all your revenue each month. For instance, if you run a catering business and have four clients with an average monthly invoice of $5,000, your total revenue is $20,000. Unfortunately, one client hasn’t paid you yet. So you only have $15,000 on hand.
  2. Calculate the cost of goods and your operational costs. For example, your catering business may have $5,000 in expenses for food, beverages, and other goods. You may also have operational costs of $10,000, which could include vehicles, labor, rent, kitchen equipment, etc.
  3. Calculate other expenses, such as business loan payments and credit card interest. Be sure to include everything related to your business. Perhaps this comes out to $2,000 per month for your catering company.
  4. Calculate whether you’re cash flow positive or negative. Altogether, you have $17,000 going out, but $15,000 coming in. You’re cash flow negative, as you’ve spent $2,000 more than you’ve received at the end of the month.

Now, once you have a clear idea of where you stand, you can begin to take steps to get or stay cash flow positive. Obviously, working hard to increase revenue is a great way to start. Here are some other ideas:


Ensure clients pay on time

Over half (64 percent) of small businesses are regularly affected by late payments, so this is an issue for many. Set a policy where you ask for a portion of money upfront, send polite reminders when the full payment is due, and charge a late fee if payment is more than a month late.

Be polite and delicate when communicating your payment policy to a client. But stay firm. You deserve to get paid in a timely manner.


Build a cushion

During months when you’re cash flow positive, stash some away for a rainy day. This way, you have funds to help out when times are slow.

If you’re not sure how much you’ll need, enough to cover operating expenses through the next pay period is a good starting point. Accumulate more over time and you’ll be set up well for the long run.


Budget effectively

Are there ways to reduce your expenses? Perhaps you’re spending too much on rent and could downsize, telecommute, or share a workspace. Maybe you don’t need so many full-time employees and can instead hire more contractors. Or it could be that you’re paying too much to a vendor and can reduce expenses by negotiating prices.

In short, look at all your expenses. Consider how you can spend less without affecting your business. Chances are you’ll find waste and be able to cut expenditures.


Don’t forget about taxes

Tax laws have been changing at the federal level, and they vary from state to state. It’s important to stay up to date and compliant.

Set aside cash each month to cover quarterly tax bills, being sure to hire a CPA if you’re unsure about how to calculate your tax liability. This money should be factored in when you looking at your cash flow.


Being cash flow positive and profitable

Now that you know the difference between being cash flow positive and profitable, and also why cash flow is so vital, start taking steps to achieve both things for your business.

In the long run, having solid cash flow and turning a profit is how you can grow comfortably and take your business as far as you’ve dreamed.