Is cash flow important

Having established that profit is not the same as cash flow, we
now need to understand the relevance of cash flow. We have noted that
the sales and cost figures included in the calculation of profit do not
necessarily bear any relationship to when cash is received or paid out.
This is evident when looking at the first month’s operation of your pen
business. In January the profit was nil (indicating that wealth was
unchanged), even though the amount of cash decreased.
This highlights a very important issue in business. For a regular
business to survive, it needs two things – it needs to make a profit to
provide a return to its investors, but it also needs to generate cash flow
to pay its expenses as they arise.
Even if you are generating a loss, you can continue to trade if you
have adequate cash flow. However, if you run out of cash, the game is
over! It’s a simple rule – no cash, no business.
The bare bones
There are two essential criteria for a regular trading
business to survive:
T It must generate profit
T It must generate cash flow
Stripping it down to basics…
Sound financial management is a prerequisite for business success.
The role of financial management in most businesses is to translate
business ideas into profit. Profit should not be confused with cash
flow:
T Profit measures changes in wealth
T Cash flow measures changes in cash balances
Given that these two concepts are not measuring the same thing, the
way they are calculated differs