Cash, cash flow, profit: What is the difference?

To effectively run a business, one needs to understand the difference between cash, cash flow and profit. Often entrepreneurs use these three words interchangeably. But they refer to different aspects of a business's financial health.

Cash refers to the money that a business has on hand at any given time. It includes physical currency and funds readily available in checking or savings accounts. Cash is critical because it allows a business to pay its bills, such as salaries or utilities, and make necessary purchases, such as agricultural inputs.

Cashflow refers to the movement of cash into and out of a business. A positive cash flow means that a business is generating more cash than it is spending, while a negative cash flow indicates that a business is spending more than it is generating. There are three types of cash flow:

• Operating cash flow: refers to the net cash generated from a company’s operations. 
• Investing cash flow: it refers to the net cash generated from a company’s investment-related activities, such as investments in vehicles (e.g., bakkie), equipment (e.g., cold room) or property (e.g., farmland).
• Financing cash flow: refers to how cash moves between a company and its investors, owners, or financiers. It is s the net cash generated to finance the company and may include debt, equity, and dividend payments.

Profit, also known as net income, is the difference between a business's total revenue and total expenses. This measure is important because it shows whether a business is making a profit or a loss. A profit indicates that a business is generating more revenue than it is spending, while a loss indicates that a business is spending more than it is generating.

👉 So why is it important to understand the differences between cash, cash flow, and profit? 

Well, for one thing, these three metrics can give different insights into a company's financial health. For example, a company may have a large amount of cash on hand, but if it is not generating enough cash flow to cover its expenses, it will soon face financial trouble as its cash dwindles. Similarly, a company may be generating positive cash flow and earning a profit, but if it does not have enough cash to cover its immediate needs, it may not be in a position to pay its suppliers or debtors, and risks becoming bankrupt.

In addition, understanding the differences between these three metrics can help a company make better business decisions. For instance, if a company has a positive cash flow but is not generating a profit, it may need to reassess its operations and find ways to reduce expenses or increase revenue. On the other hand, if a company is generating a profit but has a negative cash flow, it may need to focus on improving its cash management or finding new sources of funding.

Overall, cash, cash flow, and profit are all important financial metrics that can give insights into a company's financial health. While they may seem similar at first glance, they refer to different aspects of a company's finances.

‍