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Many small business owners get confused about cash flow vs. profit. The distinction between the two is a factor in qualifying for financial products. It also helps explain how a business can be profitable and struggling to pay the bills at the same time.
Business Funding Group LLC (BFG) is a loan packaging firm with significant experience in the small business world. We help profitable business owners secure Small Business Administration (SBA) loans so you can grow your business.
What Is Profit?
Cash flow and profit are different. Profit is the balance left after all your business expenses are subtracted from your revenue. Types of profit to keep track of include gross profit, operating profit, and net profit.
Consider a small business that makes $50,000 in sales each month. The monthly cost of goods sold is $20,000. The gross profit is $30,000 ($50,000 sales minus $20,000 cost of goods). Gross profit is what the business makes after paying the costs directly tied to sales.
From there, operating expenses such as salaries, marketing, rent or mortgage, software subscriptions, and shipping are subtracted to calculate the operating profit. Continuing with our example, if operating expenses are $10,000, operating profit is $20,000 ($30,000 gross profit minus $10,000 operating expenses).
Finally, the net profit is calculated by subtracting all remaining expenses, including finance and taxes. If our example business’s interest and taxes add up to $3,000, then the net profit is $17,000 ($20,000 operating profit minus $3,000 additional expenses).
What Is Cash Flow?
Cash flow is the money that flows in and out of your business bank account. It can be either positive or negative. A business could be profitable but still experience negative cash flow if customers delay payments or you allocate funds to expansion beyond your business’s capacity.
Cash flow can be categorized into three types:
- Operating cash flow is the cash from regular business activities
- Investing cash flow is money spent on or earned from assets such as equipment or property
- Financing cash flow is cash from loans or the repayment of debt
Because cash flow and profit offer different views of a business’s finances, profitability doesn’t guarantee positive cash flow.
Why Do Lenders and the SBA Care About Cash Flow?
Cash flow is the eligibility factor that lenders—including the SBA—look at the most, because it demonstrates whether a business can realistically make loan payments.
Understanding the difference between cash flow and profit is, therefore, essential when applying for an SBA loan. Part of an SBA loan application includes providing documents that showcase cash flow, such as tax returns, profit and loss (P&L) statements, and a cash flow projection.
Why Might Profitable Businesses Have Low Cash Flow?
Low or negative cash flow does not always indicate a failing or unsuccessful business. Some reasons why cash might be low, even if P&L statements look good, include:
- Customers are paying invoices late
- You are buying more inventory than necessary
- You have made big one-time purchases
- You are expanding too quickly without a strategy
- Debt payments are too high
Understanding how cash flow differs from profit can help you look at ways to improve your business’s cash flow.
How SBA Loans Can Help
SBA loans are one of the best tools for small business owners. These loans, specifically the SBA 7(a) loan program, can help business owners consolidate debt, free up working capital, and make monthly payments simpler and more manageable.
To be eligible for an SBA loan:
- You must demonstrate positive cash flow and the ability to repay the loan
- You and your business must have good credit scores and credit history
- You must be current on existing debts
- Your business must be for-profit and operate in the U.S.
Our team at BFG can help you understand the differences between cash flow and profit and how an SBA loan could help your business.
Call Us To Discuss the Differences Between Cash Flow and Profit
At BFG, we are experts in packaging SBA loan applications that give business owners the best chance of approval. We work with successful small business owners every day, many of whom were confused about cash flow vs. profit at first.
We can review your business’s financials, answer your questions, and determine whether an SBA loan could increase your cash flow. Feel free to call us for a free 15-minute discussion, or fill out our simple application and loan estimator.