Cash Flow Vs. Profit
Which One Is Most Important For A Consulting Firm?
Cash Flow vs Profit. Which one is most important for a consulting firm?
If you have one without the other will you survive, thrive, or is it lights out.
Cash flow and profit both are vital financial metrics that can determine the fate of your consulting firm.
It is essential to understand the difference between them in order to make valuable decisions regarding the firm’s performance and financial health.
Well in this episode, I am going to break this down. Stay tuned…
What is Cash Flow?
Cash flow is the way in which cash moves in and out of the business during a specific point in time. The money will flow in or out of the business in three ways:
1. Operating-Cash flow
It's the net cash gained from your firm's business operations. To maintain your growth, you must have a positive cash flow in your business.
2. Investing-Cash flow
It shows the net cash gained from your firm's investment-related activities like investing in securities, buying physical assets (equipment or property), or selling assets.
3. Financing-Cash flow
It indicates how cash circulates between your consulting firm and your investors, owners, or creditors.
What is Profit?
Profit consists of the net income you earned after deducting all expenses. You can determine your Net Profit by reviewing the 'Profit & Loss Statement'. Profit can be distributed among the owners and shareholders like dividend payments or reinvested back into the company.
Like Cash Flow, Profit also has three ways to penetrate a business:
1. Gross profit
It's the revenue consultants earn minus the cost of rendering their services. It does not include the fixed cost of a consulting firm like rent and the salary of those not involved in consulting.
2. Operating profit
You can call it earnings before interest and tax (EBIT). Like operating-cash flow, it indicates the net profit your firm generates from its business operations. It does not include negative cash flows such as tax payments or interest payments on debts. It also excludes positive cash flows outside the core of the business.
3. Net profit
It's the net income after paying all expenses, taxes, and interest from all revenues.
The Difference Between Cash Flow And Profit
It's the revenue earned by a business at a given point in time after deducting
It signifies the flow of cash in-and-out of business
at a given point in time.
It's the indicator of the overall success of your
It's the indicator of the liquidity of your business.
It reflects at the bottom of the 'Profit and Loss'
statement in your accounting books,
and you cannot achieve it without
It's reported in your accounting books 'Cash Flow' statement,
providing a detailed analysis of what happened to the cash in your
consulting firm. There can
be either positive or negative cash flow in your company.
Which is more essential for your firm - Cash Flow Or Profit?
This question is not as easier to answer as you may think. Both cash flow and profit are required to make informed decisions and develop business strategies.
What you must understand is that:
- Profit is how you keep score in business. You solve problems for profit.
- Cash is your business SUPERPOWER. You can not survive without cash flow.
A firm can generate a profit, and still struggle to maintain a positive cash flow. If you find that your firm is in this position where it has generated profit but struggles to cover the monthly expenses, you have a cash flow problem.
You want to then focus on improving the numbers on your Balance Sheet. That’s episode for another day. The main takeaway from this is that you want to position your firm to not only generate a profit consistently but also to remain cash flow positive at all times.
As a virtual CFO for consultants, I recommend that you implement a strategic financial plan that enables you to easily increase profit and cash flow.
A good metric to keep in mind is to strive to have at least a 20% Net Profit margin and 3 to 6 months of cash reserve at all times.
Need help implementing a financial strategy?