Importance of Cash and Profit in Business

Health of a business is determined by Cash flow and Profit. Cash flow means movement of money i.e., net of Receipts from our customers, Payments to our suppliers, other receipts and various expenses.

Cash flow has 3 components

1. Operating – Cash flow from Operations which is the net of Receipts from Customers, Payments to Suppliers and Expenses

2. Investments – Investments in Fixed Assets, Capacity/Business expansion, it has a clear long-term focus

3. Financing – Cash receipts from Equity and Debt (Capital and Loan), Interest & dividend pay outs, Repayment of Loan.

Profit is defined as the difference of Revenue and Expenses. Profit has 3 components

1. Gross Profit – Net of Revenue and Cost of Goods sold

2. Operating Profit – Net profit from business operations, is also referred as Earnings Before Interest and Tax (EBIT). This is a very important component in assessing the ability to service the loan (interest and repayment over a period of time).

3. Net Profit – Profit after considering other income, Interest and Tax expenses

Managing cash flow and profitability helps the business to move forward irrespective of whether its in Manufacturing or Services.

In order to assess cash flow and profit the business has to record all the transactions in a timely manner. It may be seen as boring and time consuming however it is extremely important as failure to effectively manage could push businesses in debt and could also end in closure of business.