See the Ultimate Match: Profit vs. Cash Flow

Many people just can’t tell the difference between cash flow and profit. You might think earning profit is almost equal to cash flow, right? Not at all. Today, I want to explain why these are very different and why cash is king, while profit only exists on paper and is just hypothetical. You can’t use profit to buy things – you need actual cash for that.

There are many cases where cash flow differs significantly from profit.

Consider this: you purchase a machine for 1000, and using the machine, you earn 50. Congratulations, your profit is 50, but your cash flow is 50-1000=-950. You’ve just lost 950 in cash.

You might say, “That’s fine – I can use the machine for a very long time, and it will eventually earn back the original investment.”

But many business operations require constant investment every year, continuously absorbing cash far beyond profit. You keep losing cash even while the business shows a profit.

The most valued businesses are those that generate cash from operations and reinvest it for further cash flow, repeating this cycle. So pursuing cash rather than profit is the best strategy for successful companies.

And here is the secret: Often, cash flow and profit-making are in a trade-off situation.

For example, if you increase inventory through bulk buying, you can reduce costs and make more profit. However, increasing inventory ties up your cash in operations, negatively impacting cash flow.

When you buy more machines to produce more products at a lower cost per unit (economies of scale), your profit increases. But buying machines means massive cash outflow, so while you see profit on paper, no cash remains in hand.

Take accounts payable – paying purchases quickly can get you discounts and increase profit, but faster payments hurt cash flow because this increases cash requirements in operations. You can see this explained in the CCC article.

If you spend less on sales, marketing, or R&D, costs decrease and you can show more profit. But future cash flow will certainly decline.

So my advice here is: keep only what’s necessary and invest all remaining cash in promising businesses. This is the only way to increase future cash flow. It’s much more important than making a profit now. But timing is crucial – if you pay too much for trash making no cash, that’s just a disaster. Wait until you find the right one.