The relationship between profits and cash flow in a business

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Profit and cash flow are two issues that play the most important role in the eyes of business administrators or investors. There are many businesses that do not clearly understand the characteristics and roles of these two concepts, leading to making wrong business decisions, causing a major impact on the business results and financial situation of the business. Let’s follow the following article to determine the difference between cash flow and profit and which is more important for a business.

1. Profit

a) Concept

A business’s profit is the difference between the revenue and expenses that the business has spent from its activities in a certain operating period.

b) Profit targets

Profit is an important financial indicator, showing the results and efficiency of production and business activities of an enterprise and is also the basic financial indicator to evaluate and forecast the ability and profit potential of a company. future business.

Profit targets are often used according to the Business Performance Report form (Form No. B02-DN issued under Circular No. 200/2014/TT-BTC)

  • Gross profit on sales and service provision
  • Net profit from business activities
  • Total accounting profit before tax
  • Profit after corporate income tax

What’s More Important, Cash Flow or Profits?

c) Meaning of profit

Profit of an enterprise is an indicator that reflects the results of production and business activities of an enterprise in an operating period. Profit is extremely important to businesses, shown in the following aspects:

 

  • Profit reflects the efficiency of production and business activities of an enterprise. When profits are positive and growing, it shows that the business is doing business effectively. On the contrary, when the profit is negative, it means the business is making a loss and the revenue is not enough to cover costs. If profits are decreasing in recent periods, the business is facing ineffective operations and needs to consider and adjust production and business activities.
  • Profit is the source of distribution to owners in the form of profit sharing or dividend payments in joint stock companies.
  • Profit is a source of accumulation to supplement business capital for businesses to help them expand their scale, and is a premise for future scale growth.

2. Cash flow

a) Concept

Cash flow represents the flow of money in (cash inflow) and the flow of money out of the business (cash outflow) during a certain operating period.

For example: When a business sells a product and receives payment from customers, cash flows into the business through collection activities; On the contrary, when a business purchases raw materials to produce goods and pays suppliers, cash flows out of the business through payment for raw materials.

A business’s cash flow can be positive or negative. Positive cash flow means that the amount of money moving in is greater than the amount of money moving out, simply put, the amount of money the business receives is greater than the amount of money the business spends. On the contrary, when cash flow is expressed in negative numbers, the business has a larger amount of money moving out than the amount of money moving in, that business spends more than it receives.

b) Cash flows in the business

A business’s cash flow arises from three operating sources

  • Cash flow from business activities
  • Cash flow from investing activities
  • Cash flow from financial activities

c) Meaning of cash flow

Cash flow is likened to the lifeblood of a business. Without cash flow, almost any activity cannot be implemented.

Small and medium-sized enterprises do not have easy access to capital mobilization sources. This difficulty is one of the biggest barriers threatening the existence and growth of small and medium-sized enterprises in the context of microeconomic conditions. tissue has many changes. More than anyone else, small and medium-sized businesses need to understand the importance of cash flow and build and implement a cash flow management plan carefully and wisely.

The Relationship Between Cashflow and Profit In Your Business

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Thus, regardless of the size of the business, controlling and balancing cash flow and building a cash flow plan plays a crucial role, ensuring the survival of every business.

To manage cash flow effectively and bring maximum benefits to businesses, accountants need to track all transactions, payment status, and payment deadlines. In addition to cash flow, businesses also need to quickly report other financial indicators. Therefore, businesses should prioritize using accounting services that support cash flow tracking. For example, Smart Solutions For Business Company Limited (S4B Vietnam) can help businesses have reasonable policies when considering two factors: profit and cash flow in each stage of development of their business as well as in each period of fluctuations in the market economy.

S4B Vietnam

  • Address: Unit 602A, Tower A, Handi Resco Office Building. 521 Kim Ma Street, Ba Dinh District, Hanoi
  • Tel: + 84 24 3974 4181
  • Email: service@s4b.com.vn

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