How can a company report record profits and suddenly file for bankruptcy? The answer lies in the critical difference between making a sale and getting paid for it.
Cashflow is the actual money moving into (inflow) and out of (outflow) your business during a specific period.
It is the real-time financial pulse of your company, separate from profit, which is an accounting measure of revenue minus expenses.
Simple Example
Imagine you own a consulting firm. You complete a $50,000 project in January. You are profitable by $50,000 (minus costs) on paper for that month.
But, your client has 90 days to pay the invoice.
Meanwhile, you must pay $15,000 in salaries and $5,000 in rent in cash during those 90 days. You have positive profit but negative cashflow. If you don't have savings to cover that $20,000, your business fails.
Why It Matters
Cash is the oxygen of a business; profit is just the plan.
You use cash to pay salaries, buy inventory, and service debt. A positive cashflow ensures you can meet your obligations and invest in growth.
A negative cashflow, even with high profits, means you risk default. This is why "Cash is King" remains the most important rule in business.
Quick Summary
Profit is an accounting opinion of wealth, but cashflow is the bank-account fact that determines your ability to operate and survive.