In the world of business, revenue and profit are often seen as the ultimate indicators of success. After all, revenue represents the money coming in, and profit symbolises what’s left after all expenses. While these metrics are undoubtedly crucial, there’s another, often overlooked, financial element that can make or break a business: cash flow.
turnover is vanity, profit is sanity and cash is reality
Jim Rohn
The maxim of ‘turnover is vanity, profit is sanity and cash is reality’ was coined by the famous investor Jim Rohn – and is worth committing to memory. Particularly the last three words.
Cash flow, the lifeblood of any enterprise, deserves more attention than it typically receives. In this blog, we’ll explore why cash flow is more important than revenue and profit in a business.
Cash Flow is Real Money in the Bank
Revenue and profit are vital figures, but they can be misleading. Revenue reflects the total amount of money generated from sales, but it doesn’t necessarily mean that money is in your bank account. Profit, on the other hand, factors in expenses and is more indicative of your financial health. However, even profit can be deceiving, as it includes non-cash items like depreciation and amortisation. Cash flow, however, is tangible – it represents the actual money flowing in and out of your business.
In the real world, cash pays the bills, employees, and suppliers.
Liquidity Matters
In business, liquidity is key to survival. Having a lot of revenue or profit on paper won’t help if you can’t access the cash when you need it. Cash flow ensures that you can meet your immediate financial obligations, such as payroll, rent, and utilities, without resorting to debt. It provides a safety net in case of unexpected downturns or emergencies, making your business more resilient.
Managing Day-to-Day Operations
Cash flow is essential for day-to-day operations. You need cash to purchase inventory, pay suppliers, and fund marketing and advertising. These activities are the backbone of your business, and without adequate cash flow, you risk stalling your growth or even closing shop.
Growth and Investment
While profit is essential for long-term sustainability, cash flow is crucial for short-term growth and expansion. You may be profitable but unable to invest in new equipment, hire more employees, or open new locations if your cash flow is tight. A strong cash flow allows you to seize opportunities when they arise, without having to rely on loans or external financing.
Debt Management
Cash flow plays a vital role in managing debt. If your business is highly leveraged, a healthy cash flow can help you meet your interest payments and gradually reduce your debt burden. It can also improve your creditworthiness, making it easier to secure loans at favourable terms when needed.
Flexibility and Adaptability
In today’s fast-paced business environment, adaptability is key. Having a robust cash flow gives you the flexibility to pivot when market conditions change or when unforeseen circumstances arise. It allows you to invest in research and development, explore new markets, and adjust your strategies without being constrained by a lack of funds.
Conclusion
While revenue and profit are essential indicators of a business’s financial health and long-term sustainability, cash flow reigns supreme in the short term. It’s the tangible, real money that keeps your operations running smoothly, helps you seize opportunities, and ensures you can meet your obligations. In a world where economic uncertainty is the norm, managing cash flow should be a top priority for any business.
Revenue and profit may tell part of your financial story, but cash flow is the hero that keeps the story moving forward.
