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Profit vs. Cash Flow: What's More Important?


Retailers generally agree that profit is their single most important commodity. Without profit a business dies rather quickly. That said, of equal importance is positive cash flow. The difference between the two? Bad cash flow will close a business quicker than bad profits.

In simplest terms, cash flow refers to the amount of available cash a retailer has at any time as a result of cash income (e.g., sales) versus cash expenditure (e.g., inventory purchases and expense payables). It is a distinctly different dynamic from profitability, which measures profits or losses from operations including both cash and non-cash expenses.

In the case of profitability, you can lose money for a year or two and still not go out of business. A loss year only reduces the net worth (the difference between total assets and total liabilities) of a company. On the other hand, if you run out of cash and can’t make payroll or your bank loan payment, then you will have to obtain additional paid-in capital (cash) or close your business. Let’s look at this another way: Having a positive cash flow allows a retailer to stay in business and meet all its cash expenditures such as payroll, payables and debt obligations. Profit, on the other hand, is the profit or loss report card for a defined period of time such as a month or a year.


In order for a retailer to keep the business liquid and healthy, a cash flow analysis (or cash budget) is needed much like an open-to-buy (OTB) budget is needed relative to inventory purchases. In the case of cash, however, the budget becomes cash available to spend versus an open-to-buy, which addresses inventory to be ordered relative to inventory dollars on hand and on order compared to projected sales.

A cash flow analysis is usually constructed in 30-day increments. In such a plan, you’ll compare likely cash income such as sales and receivables against likely cash outflow such as payroll, payables and scheduled payments such as bank loans or car payments. If planned cash input equals or exceeds anticipated cash outflow, then the retailer remains liquid and viable.

Of all the challenging problems retailers face, cash flow is fraught with danger. If payables or payroll is due and if the retailer can’t borrow or get additional paid-in capital, then the company is technically insolvent. As I said before, you can operate without profits for a year or two, but you cannot operate without sufficient cash. To keep your cash account healthy, I recommend retailers do the following:

Remember that profits are great, but cash is king. Being liquid is the thing that allows you the flexibility to take advantage of opportunistic purchases and adjust to fluctuating circumstances.

About the author: Robbie Brown has an extensive background in retailing, wholesaling, distribution service industries and consulting.  He has been CEO of numerous companies in the shooting sports industry, including several retail chains and distribution companies. Brown consults for businesses of all sizes in both the merchandise and service industries, as well as for a variety of corporations, industry groups and trade associations. He is a frequent round-table moderator and speaker before industry trade shows, conventions and other corporate groups, and he has published more than 300 business-related articles in various trade magazines, delivered hundreds of speeches and served as a business advisor to many CEOs  inside and outside of the firearms industry.

To view the full article from Tactical Retailer, click here.