Have you ever wondered why you have cash flow problems when you're making a profit? While cash flow and profit have many things in common, they're not the same. Although profit is very important to your business, it can be misleading in the sense that it doesn't relate to your actual cash on hand that can be used to keep your business going on a day-to-day basis.

So what's the difference? And how can you use tech to stay on top of both?

The main difference between cash flow and profit is that profit indicates the amount of money left over after all your expenses have been paid, while cash flow indicates the net flow of cash into and out of a business. According to Harvard Business School Online:

"For investors, understanding the difference between profit and cash flow can make it easier to know whether a profitable company is actually a good investment based on its ability to remain solvent in times of economic crisis. For entrepreneurs and business owners, understanding the relationship between the terms can inform important business decisions, including the best way to pursue growth."

Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. If your cash flow is positive, that means that you have more money coming into your business than moving out of it. If your cash flow is negative, then you have more money flowing out of your business than into it.

Cash flow is comprised of 3 main categories:

On the other hand, profit is the balance that is leftover after all of your business's operating expenses are subtracted from your revenue. There are two main types of profit:

While raising profits is advantageous for your company’s bottom line, it’s important to remember that new sources of profitability – such as the development of a new product – may raise expenses, pushing costs beyond the breakeven point and causing your company to run out of money if operations are mismanaged.

Ultimately, cash flow and net profit measure different things. While profit is the goal – and an indicator of financial health – cash flow is the lifeblood of your business, keeping operations going every day.

For a growing business, both cash flow and net profit are important, but in the short-term, cash flow is likely the number one concern.

While it seems counterintuitive, it is possible to have cash flow issues even if your business is growing! In fact, sometimes the growth of your business can actually generate issues with cash flow. For example, during a period of high growth, a company may accept too many orders without having enough cash to produce them, making it necessary to sell stock or seek a loan.

To function, you need operating cash flow to meet payroll, make rent and insurance payments, and handle other day-to-day expenses to keep business running as usual.

That’s why it’s so important to understand cash flow vs. profit and to know when to ease up on growth for a little bit for the sake of your organization's long-term prospects.

Using apps like Syft and Reducer can help you to ensure that your business is in good health today and in the future. It's crucial to ensure that your operations are sustainable in the long term. Here are 5 top tips to stay on top of your cash flow:

One way to stay on top of your cash flow is to make regular cash flow forecasts with different scenarios in mind. Syft's Cash Manager helps you to create accurate cash projections for the future which can direct your future business decisions. As Luan van Rhyn of Thrive CFO says:

"A business doesn't survive solely on profits; it survives on cash."

By having a cash flow forecast, you are able to see the difference between your profit and cash flow, while also identifying the peaks and troughs in cash flow before they occur. Moreover, a cash flow forecast gives your staff confidence that you are on top of your business's financial health.

It's also worth considering seasonal cash flow problems. While the cash may be flowing into your business in abundance over the Christmas period, this won't likely be the case during months that are devoid of big holidays. It may help you to diversify your trading activities so as to even out seasonal trading patterns.

Alternatively, you might consider delaying supplier payments where possible to save your cash when you need it the most. And by using Reducer, you can ensure that you aren't spending more than you need to on supplier payments.

Staying on top of unpaid invoices is key. Consider ways in which you might incentivize debtors to pay you timeously, such as:

A budget acts as a roadmap to guide you according to your future plan of sales, costs, and overheads. It can also reveal waste when compared to actuals every month. Ultimately, budgeting aligns the priorities within your business and you can allocate specific areas of accountability to different team members – each with their own budget.

You can build a budget on Syft across your profit and loss, balance sheet, and financial KPIs. And you can also budget for non-financial business drivers such as units sold or website visits.

Ultimately, the most beneficial thing you can do is have a plan for your business. This can consist of various things – such as your budget, cash flow forecast, and strategies for managing accounts receivable and accounts payable. Successful businesses are systematic, clued up on their financial data, and responsive to what they see in that data.

By using tools such as Syft to monitor your data health and make a plan for the future, while reducing your overheads and supplier payments with Reducer, you are more likely to have a strong cash flow – and strong profitability too.

This article was originally published on Reducer's blog here.