An entrepreneur should focus more on cash or profits. ?

1. Q] Is it more important for an entrepreneur to track
cash or profits. Does it depend on the type of business
and/or industry ? What troubles will an entrepreneur
face if he tracks only cash and ignores profits ?
This might be the most asked question in small business since the beginning of
time: should a business be focusing on the cash or the profit?
Cash flow and profits are both crucial aspects of a business. Cash flow is the
inflow and outflow of money from a business. It is necessary for daily
operations, taxes, purchasing inventory, and paying employees and operating
costs. Profit is the surplus after all expenses are deducted from revenue. Profit is
the overall picture of a business, and the basis on which tax is calculated.
However when determining which one is more important, it depends on the
business and the circumstances.
In some cases, a business owner must choose between the two. For example,
should a business give customers a discount if they pay early? Many businesses
will offer as much as a 10 per cent discount for seven-day payment terms. The
result is that the cash comes in faster, but the profit is reduced.
So, how should a business decide which to focus on? Unfortunately, the answer
is it depends.
If a business is highly profitable, but has no cash, the cash flow is the priority.
An example is where a business is making profit each month, but the owner has
no cash to pay the weekly wages bill. How can this be? In this instance, it’s
quickly apparent that the business is owed a very large amount by their debtors.
The business had trading terms of 120 days from statement. So, the business
owner wrote to every customer who owed money and offered a 10 per cent
discount on seven-day terms. Within a month, the business has become cash
positive and has never looked back. So, in this situation, cash was most
important, while profit came second.

2. If a business has lots of cash, but is not profitable, the result is that over time,
the cash position will deteriorate. So, what does the business owner do? To
retain or improve the cash position, the business must move to a profitable
trading position. There are only two major decisions to profitability. The first is
to increase revenue, while the second is to reduce costs. All business owners are
continually adjusting these two levers to improve the business’s profit. If the
owner cannot get to a profitable position, it would be better to close up the
business and to hold onto whatever cash there is. If they wait too long, all the
cash will disappear. So here, profit must be the focus.
In the unfortunate situation that both profit and cash are in short supply, which
is the focus? In this situation, both are critical – but if you had to decide, it
should be profit. Profit adds cash to the business; this then gives the business
the opportunity to manage its cash until further new cash (profit) comes into the
business.
An interesting fact is that cash can be sourced from a few different areas.
Firstly, the business owners can put personal funds into the business usually
called capital or equity. Also, the business can borrow funds from banks, other
lending Institutions, or even individuals. The final way a business can access
cash is through making profits, which then creates new working capital. In
contrast, the only way to make profit is by selling something for more than what
it cost to produce.
Therefore it depends on the business as to which is most important.
Ignoring profits may cause damages on account of:
 If an entrepreneur tracks only cash flow and ignores profit he may face a
situation where eventually his cash will also dry out. Profits add to the
cash flow positively and keep the business going.
 The main goal of any business is to make profits and if there is a lack of
focus on that part, then the business will not survive for long.

3.  Profits fund your expansion plans and keep the business going and hence
ignoring profits is a mistake that no entrepreneur should make.
 If the nature of a business is such that its niche, then profits are
paramount owing to the fact that sales are limited to a certain number
during a given period and profits are the only measure of a business’s
success and sustainability.
 A focus on profits keeps the entrepreneur trying to reduce costs,
operating costs and such. This renders the business more efficient and
sustains the interest of its human resources. A declining firm is like a
sinking ship that everyone abandons.
 Cash flow depicts a great financial liquid position to investors and
stakeholders. However after a certain period, profits reflect the true
sustainability of any business. Therefore it becomes important to focus
equally on the profits standing of the business and not just focus on the
cash flow position.