Cashflow vs Profit: Why You Need to Watch Both (And How to Improve Them)
Many business owners in New Zealand focus on their profits and assume their business is healthy until they realise there’s not enough cash in the bank to pay suppliers, wages, or tax. The truth is, profit and cash flow are not the same thing.
You can have a profitable business on paper, but still struggle to pay your bills. Understanding the difference and managing both effectively is key to long-term success and financial stability.
Let’s explore what makes cash flow and profit different, why both matter, and how you can improve them.
1. The Difference Between Cashflow and Profit
At first glance, cash flow and profit may seem interchangeable, but they measure very different things.
Profit is the amount left over after all business expenses are subtracted from total income. It’s based on accounting principles (accruals) and doesn’t always reflect actual money in the bank.
Cashflow tracks the movement of money in and out of your business, what’s actually available to spend. It shows whether you can meet day-to-day obligations, such as paying bills, wages, or taxes.
In short:
Profit tells you how successful your business is on paper.
Cash flow tells you how healthy your business really is.
2. Why Cashflow Problems Can Happen Even When You’re Profitable
It’s a common story: a business looks profitable but struggles with liquidity. This usually happens because of timing differences between income and expenses.
Common reasons include:
Customers take too long to pay invoices.
Stock or materials are purchased upfront but not sold immediately.
Large projects have long payment cycles.
Excessive growth, taking on more work without sufficient cash reserves.
Big tax or GST bills catch you off guard.
Even if you’re profitable, poor cash flow can put your business at risk if you can’t cover short-term commitments.
3. Why Profit Still Matters
While cash flow shows immediate financial health, profit indicates long-term sustainability. Consistent profit allows you to reinvest in your business, pay down debt, and build reserves for future growth.
Profit helps you:
Measure business performance over time
Plan for expansion or investment
Improve valuation if you plan to sell your business
Identify areas where costs can be reduced
The key is to balance short-term cashflow needs with long-term profitability goals.
4. How to Improve Your Cashflow
Healthy cash flow doesn’t happen by chance; it requires proactive management and good systems.
Here are proven strategies to strengthen your cash position:
Invoice Faster and Smarter
Send invoices immediately after completing work.
Use online invoicing with automated reminders.
Offer online payment options for faster turnaround.
Negotiate Better Terms
Shorten payment terms for customers where possible.
Extend supplier payment terms (without damaging relationships).
Offer early payment discounts to encourage faster payments.
Monitor and Forecast Regularly
Use accounting software like Xero to track cash flow in real time.
Create rolling 3–6 month forecasts to identify future shortfalls.
Build a cash reserve to handle seasonal dips or emergencies.
Manage Expenses Carefully
Review subscriptions and recurring costs regularly.
Avoid unnecessary spending during slower months.
Plan major purchases when you have surplus cash.
5. How to Improve Your Profitability
Improving profit isn’t just about cutting costs; it’s about increasing value and efficiency.
Focus on these areas:
Pricing: Review your pricing structure to ensure you’re charging enough to cover overheads and earn a margin.
Efficiency: Streamline workflows and automate admin tasks to reduce time and labour costs.
Cost Control: Identify high or unnecessary expenses that can be trimmed.
Productivity: Invest in training, tools, or systems that improve output and accuracy.
Customer Value: Focus on high-margin products or services and strengthen relationships with repeat clients.
A small improvement in pricing or efficiency can significantly boost your bottom line.
6. Track Key Financial Metrics
Regularly monitoring both cash flow and profit gives you a clear financial picture and early warning signs of trouble.
Important metrics to track:
Gross profit margin: Shows how efficiently you deliver your product or service.
Net profit margin: Measures what’s left after all costs.
Operating cash flow: Indicates whether your core business is generating positive cash flow.
Current ratio: Compares your short-term assets to liabilities to assess liquidity.
Affinity Accounting helps clients understand and interpret these numbers, turning raw data into actionable insights.
7. Combine Profit and Cashflow Planning
The best financial strategies balance cash flow and profitability. Forecasting both helps you prepare for the future and avoid surprises.
At Affinity Accounting, we help clients:
Build tailored cashflow forecasts
Set realistic profit goals
Plan for taxes and seasonal trends
Model different business scenarios
This holistic approach ensures you’re not just surviving but building a strong financial foundation for growth.
Final Thoughts
Profit shows your business is doing well, but cash flow ensures you can keep operating. To run a sustainable, thriving business, you need to watch both closely and plan ahead.
With the right systems, habits, and advice, you can maintain healthy cash flow, improve profit, and grow with confidence.
Talk to the Affinity Accounting team today to find out how we can help your business grow with expert accounting and advisory services.
What our clients say
“Dylan is one of the best accountants I've worked with. He makes a point of explaining things as plainly as possible to those of us who don't understand accounting speak. He has a solid knowledge of best practices in the industry, but most importantly he will always recommend what is most suitable for your specific business. I will continue to recommend Dylan and Affinity Accounting to my clients when they are looking for an accountant.”
-Jay Brooker