Running a business is exciting, but it can also be confusing, especially when the numbers in your sales report don’t match the reality in your bank account. Many entrepreneurs around the world experience this, where the books say the business is doing well, yet the account balance is struggling to stay afloat. Whether you’re running a fish farm, selling fashion pieces online, baking pastries, or building a tech startup, you’ve probably had moments where the figures look promising but the cash simply isn’t there. And, that’s why you need to understand what cashflow and profit means.
Cashflow and profit sound similar, they are both important, but they perform completely different roles in determining the health of your business. A lot of small businesses collapse not because they were not profitable, but because their cashflow was mismanaged or ignored. As Warren Buffett once said, “Performance gets measured by profit, but survival is determined by cash.”
What Exactly Is Profit?
Profit is the money your business keeps after covering all its costs. If you strip away the complex financial statements and accounting language, profit simply answers the question: “Did my business make money after all the expenses?”
The basic formula would be this:
Profit = Total Revenue – Total Expenses
If your business makes $500 in sales and spends $300 running operations, maybe spent on feeding the fish, buying flour, stocking your inventory, running ads, paying rent, the profit is $200.
This is the number people like to brag about. It’s the number that looks good on paper. It’s what tells you:
- If your business is priced correctly
- If your idea is viable
- If the business model is profitable
- If the business can grow long-term
But, the painful truth, one many business owners don’t discover until they’re in a financial crisis: