One of the most important lessons a business owner has to learn, often painfully, is that cash really is king. We are talking cash flow. Simply put, it doesn’t matter how much money is coming in the future if you don’t have enough money to get from here to there. Employees can’t wait on paychecks until your customers pay. Your landlord doesn’t care that you’re talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.

More businesses fail for lack of cash flow than for lack of profit. Why is this? Two main reasons:
1. Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses.
2. Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.

So what is the difference between cash flow and profit?
Profit is the difference between income and expenses. Income is calculated at the time the sale is booked, rather than when full payment is received. Likewise, expenses are calculated at the time the purchase is made, rather than when you pay the bill.

Cash flow is the difference between inflows (actual incoming cash) and outflows (actual outgoing cash). Income is not counted until payment is received and expenses are not calculated until payment is made. Cash flow also includes infusions of working capital from investors or debt financing.