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For small businesses, access to capital is critical for growth and success. One option that small business owners are increasingly turning to for quick and nimble access to capital is a merchant cash advance (MCA). 

However, like any financial decision, there are pros and cons to consider before proceeding with this type of alternative funding. In this article, we’ll dive into merchant cash advances to help you determine if they’re the right choice for your business.

Understanding the merchant cash advance 

Before digging into the pros and cons, let's first understand what a merchant cash advance is. Simply put, it’s an alternative form of financing where an MCA company provides a lump sum payment to a business’s bank account in exchange for a percentage of its future credit and debit card sales.

Merchant cash advances have gained popularity among small businesses in recent years thanks to their flexibility and accessibility. Unlike traditional bank loans, which often require extensive paperwork, a lengthy approval process, and oftentimes collateral, not to mention years of operating history, MCAs offer a quicker and more streamlined funding solution.

A merchant cash advance is not a loan but rather an advance on future revenue. This means that the funder takes a calculated risk based on the business's projected credit and debit card sales. In return, the business agrees to pay the advance, along with a predetermined fee, by allowing the provider to collect a portion of its daily or weekly credit and debit card transactions.

One of the key advantages of a merchant cash advance is that it allows businesses to access funds quickly, without the need for collateral or a high credit score. This makes it an attractive option for businesses that may not otherwise qualify for traditional loans or have urgent funding needs, such as an oven on the fritz or a truck in the fleet requiring repair.

Once approved for a merchant cash advance, the business receives a lump sum payment in their bank account. This 

 can be used for a wide range of use cases for your business, such as 

 repairing or upgrading equipment, or covering unexpected expenses, to name a few.

The payment is structured to ensure that the capital provider receives a portion of the business's daily or weekly credit and debit card sales until the advance, along with the agreed upon fee, is fully repaid. This payment arrangement continues until the capital provider has recouped the full amount, plus the fee, also known as a factor rate, which is 

the amount fluctuates based on the business's sales volume typically

 expressed as a decimal in a range of 1.1-1.5. 

For example, a $10,000 USD advance at a factor rate of 1.2 is another way of illustrating a fee of 20%. Here’s the equation:  

1.2 x $10,000 USD = $12,000 USD total payments  

It's important to note that the payment process is typically automated, with the funder deducting a fixed percentage from the business's daily or weekly credit and debit card transactions. This means that the payment amount fluctuates based on the business's sales volume, providing some flexibility when times are slow. 

Merchant cash advances are often used by businesses in industries with high credit and debit card usage, such as retail, restaurants, and e-commerce. The payment structure aligns with the business's cash flow, as the provider only collects a percentage of the credit card sales, rather than a fixed monthly payment. When business is good, payments are on the higher side while during slow periods payments are smaller.

Furthermore, merchant cash advances are not subject to strict payment schedules or term limits. This allows businesses to focus on their operations and growth, without the added pressure of meeting monthly loan payments.

Compared to more traditional options, a merchant cash advance offers several advantages that can benefit businesses in need of quick access to capital.

One of the primary benefits of a merchant cash advance is the quick infusion of cash it provides. Unlike 

, which can take weeks or even months to be funded, a merchant cash advance can be obtained within days. This swift access to capital allows businesses to seize opportunities and cover immediate expenses that they might otherwise miss.

Additionally, unlike conventional loans, a 

merchant cash advance does not typically require collateral

, such as a piece of real estate or machinery to back the funding. Instead, the capital provider assesses the risk based on the business's credit and debit card sales volume and reserves the right to collect a portion of future transactions. This eliminates the need for businesses to put up valuable assets as collateral so a business owner can sleep better at night. MCAs also don’t typically require personal guarantees, which are common with loans.

Yet another advantage of a merchant cash advance is that they often have higher approval rates. Traditional lenders may deny loan applications due to various reasons, such as a 

, insufficient credit history, or lack of collateral. However, with a merchant cash advance, the primary consideration is performance, more specifically the business's credit and debit card sales volume, making it easier for businesses with lower credit scores, a limited operating history, or few assets to obtain financing.

While merchant cash advance offers several benefits, it is crucial to consider the potential drawbacks before making a decision. 

One of the potential drawbacks of a merchant cash advance is the cost. Since the capital provider assumes a higher risk by not requiring collateral or performing an extensive credit check, the fees associated with this type of financing may be higher than those of traditional loans. It’s essential to carefully consider the cost and evaluate if the benefits outweigh the expenses before signing on the dotted line.

Another consideration is the potential impact an MCA can have on 

. Payment for a merchant cash advance is directly tied to the business's daily or weekly credit card sales. During periods of lower sales, the payment amount decreases. When sales are up, the payment amounts will also increase. It’s important to consider your future revenue and whether you anticipate a spike that could cause your payments to go up. 

As with any business decision, it is vital to thoroughly evaluate your specific needs and goals before pursuing a merchant cash advance.

Take the time to review your financial situation and determine if a merchant cash advance aligns with your business's financial goals. Consider your current cash flow, revenue projections, and the potential impact of payments on your day-to-day operations. Keep in mind the short-term nature of MCA financing and the expectations of the funder. 

Furthermore, clarify your business goals and growth plans. Evaluate whether a merchant cash advance will contribute to your business's long-term success or if alternative financing options may be more suitable. Be sure to weigh the pros and cons against your unique circumstances.

In conclusion, a merchant cash advance can be an attractive option for businesses in need of short-term working capital. However, it is important to carefully consider the pros and cons and assess your specific business needs before making a decision. By doing so, you can determine if a merchant cash advance is the right choice for your business's financial goals and chart a path to success.

Learn the ins and outs of merchant cash advances, the types of businesses that benefit most, and if an MCA is right for your capital needs.

Learn the ins and outs of merchant cash advances, the types of businesses that benefit most, and if an MCA is right for your working capital needs.

Is a Merchant Cash Advance Right for Your Business?

It's an incredible achievement to see your products generating revenue. However, assessing your financial health goes beyond just focusing on profits.

It's crucial to take into account all the inflows and outflows of cash within your business. If your cash expenses are more than cash coming in the door at any given point, you run the risk of not being able to keep those doors open.

That's where cash flow comes in. It's like a financial health check for your company. It tells you whether you can meet your financial obligations and keep things going. Understanding your cash flow is essential to keeping your business on solid ground.

In this guide, we'll walk you through each step of the cash flow calculation, explain what each component means, and share some practical tips to help you manage your cash flow like a pro.

Before we proceed, here are some basic definitions to keep handy:

provides valuable insights into the overall financial health of your business. A cash flow statement tracks the inflow and outflow of money over a specific period, be it weekly, monthly, or yearly.

 merely reflects how well your products and services are being sold. On the other hand, cash flow offers a comprehensive view of your company's ability to sustain itself.

 indicates that your business generates more cash than it spends.

 indicates that you’re spending cash faster than you’re bringing it in.

Cash flow refers to the movement of money into and out of a business or organization over a specific period, typically measured on a weekly, monthly, or yearly basis. It's a snapshot of your financial health, showing you how much cash is coming in and how much is going out.

It provides a clear picture of the cash generated from operating activities, as well as the cash used for investments and financing activities.

Now, let's talk about why cash flow matters. For small business owners and founders like you, it's essential to have a clear picture of your company's financial obligations. Cash flow gives you that insight. It tells you if your business can meet its financial commitments, like paying suppliers and covering expenses. By tracking cash flow, businesses can gain insights into their liquidity, manage their working capital effectively, and make informed decisions ab out budgeting, investment, and growth.

Many business owners make the mistake of assuming 

revenue or profit generated is the same thing as cash flow, but this is false

. Cash flow provides a more holistic view. It goes beyond sales and gives you a comprehensive understanding of your company's ability to sustain itself.

Let's take a moment to clarify some important cash flow definitions before diving into our calculations:

Your cash flow is a measure of how much cash flows in and out of your business, so to calculate it, you need to look at your total cash inflow and outflow and find the difference. Here’s a simple formula for doing so:

Net Cash Flow = Total Cash Inflow - Total Cash Outflow

Subtract Cash Outflows from Cash Inflows:

While net cash flow gives you an overall picture, you can also look specifically at cash flow from operating activities, financing activities, and investing activities. Now, let’s go into how to calculate the figures for each:

Start by calculating your cash flow from operating activities, which represents the money generated and spent as a result of your primary business operations.

There are two approaches to obtaining the numbers for operating cash flow: direct and indirect cash flow.

To calculate operating cash flow with the indirect method, you'll need your net income, 

, and changes in working capital (company assets). The formula for operating cash flow is:

Operating Cash Flow = Net Revenue + Non-Cash Expenses - Net Increases in Working Capital

Next, calculate your cash flow from assets and investing activities. Determine how much money your company spends and earns from investment activities, such as equipment purchases and sales, property acquisitions, business acquisitions, and marketable securities.

Once you have the details of your business investments, calculate your investing cash flow:

Investing Cash Flow = Revenue From Investing Activities - Losses From Investing Activities

Lastly, calculate your financing cash flow by considering your company's financing activities, including interest/loan payments, funds raised from equity distribution and 

, and dividend payments (if applicable for publicly traded companies).

Once you have these details, use the following formula to determine your financing cash flow:

Financing Cash Flow = Cash Received From Loans and Equity Raises - Loan Repayments - Dividend Payments

By analyzing each of these cash flow components, you can gain valuable insights into your business's cash flow dynamics and identify areas for improvement or optimization.

Analyzing and evaluating cash flow metrics

You've mastered the fundamentals of cash flow. But that’s not all you need to know. You also need to know how to interpret cash flow for your business in order to know what’s good, what’s bad, and how you compare to others in your industry. We’ll look at a key cash flow metric next: cash flow ratio.

Analyzing your cash flow ratio is a vital aspect of evaluating your company's financial standing. The cash flow ratio provides a measure of your business's liquidity by comparing your cash flow to your liabilities. It helps assess how well your company can meet its short-term financial obligations and indicates its ability to handle unexpected expenses or downturns in the market.

Once you've calculated the different types of cash flow, you can use the cash flow ratio formula to assess your company's liquidity. To calculate the cash flow ratio, simply divide your cash flow by your liabilities. This can be done using your overall cash flow or by analyzing specific forms of cash flow, such as operational, investing, or financial activities. 

Cash Flow Ratio = Cash Flow / Liabilities

If your ratio is less than one, it indicates that your company needs to reduce expenses to improve cash flow. Without making any changes, you risk depleting your cash reserves.

On the other hand, a ratio higher than one signifies that your company is generating enough cash to meet its 

. However, if the ratio is excessively high, it may indicate the need to reinvest in your business to foster growth.

Analyzing and evaluating cash flow metrics, like cash flow ratio, and using them as part of your financial analysis toolkit, can help you effectively manage your cash flow, make informed decisions, and ensure the long-term success of your business.

Now that you have a solid understanding of how to go about calculating your cash flow, let's explore some effective strategies to maximize it. Use the cash flow management tips below to better your company’s financial performance.

Invoices can often be a major drain on cash flow. While you may make sales, if customers don’t pay in a timely manner, it can lead to unexpected slowdowns in your business operations.

To mitigate this, it's essential to stay on top of your invoices. Regularly audit unpaid invoices and follow up with customers to ensure timely payments. Consider shortening your payment terms to improve cash flow. As your business grows and gains reliable customers, you can offer longer net terms to accommodate their needs.

To encourage prompt payments, consider sending payment reminders before the due dates, offering incentives for early payments, providing multiple payment options, accepting partial up-front payments, and establishing stricter credit policies to avoid giving overly generous terms to customers who are unlikely to pay on time.

Keeping a close eye on your business expenses is crucial. Without regularly auditing your cash outflows, you risk wasting money on unnecessary expenses, which can significantly impact your cash flow.

This is especially true for smaller purchases. Pay attention to them, as they can add up over time. A few small purchases here and there isn’t a big deal, but if you make a ton of small buys, they can drastically increase your business expenses. Review your expenses to identify areas where you can cut back without compromising the quality or efficiency of your operations. 

Here are a few additional items to consider looking at when cutting expenses:

Your company’s cash flow is more than the money you generate from income and investments. It also includes the money you bring in due to financing—whether dilutive funding through equity or non-dilutive sources like loans.

 will help you access the money you will receive in the future. By securing additional funding, you can access capital to support growth initiatives, marketing activities, inventory purchases, and hiring.

Consider different financing options based on your specific needs. For instance, equity financing can be a viable choice if you're looking for a partner to support your business. The person offering financing takes a stake in the business and has a vested interest in helping it grow.

, such as bank loans, invoice financing, and equipment financing, are also an option if you don’t want to give away equity. 

Vendor costs can be a significant drain on your business, especially for product-based companies. The money tied up in inventory can impact your cash flow negatively if sales are not swift. You’ll spend a lot of cash to get the inventory you need, and if you don’t sell quickly, your money gets tied up in your warehouse.

For online businesses, technology vendors play a crucial role, and their costs can quickly add up if you’re not careful.

This is why you want to regularly review your spending with vendors to identify opportunities for cost savings. If you purchase large enough inventory, you may want to consider negotiating pricing discounts based on volume. If you're not tied to specific vendors, then shopping around to find better deals is a great place to start.

Earlier, we talked about shortening payment terms for customers to help speed up cash inflows. If you have a solid relationship with your vendors, you can also negotiate 

 payment terms to help with outflows as well, giving you more flexibility.

To anticipate and plan for future cash flow, consider creating cash flow forecasts. These projections allow you to estimate the cash flow your business can expect based on historical data, market trends, and anticipated business growth.

Here is some important information to keep in mind when making cash flow projections:

By combining these factors, you can create projections that will help guide your decision-making process.

For instance, let's say you have a new product launch coming up. By analyzing your future cash flow, you can determine how much available cash you'll have for your marketing budget. This way, you can allocate your resources wisely and focus on the marketing channels that help you get the most out of your ad dollars. You can also use tools like 

, or specialized cash flow forecasting software to create detailed forecasts. 

Understanding your company’s cash flow helps you make smarter business decisions. When you know how much is coming in, going out, and any gaps between the two, you’ll be better prepared to make the most of your cash and take advantage of every opportunity. 

Learn  what cash flow is, how to calculate it, and why it matters to a healthy, sustainable business. 

How to calculate cash flow for your business

How To Calculate Cash Flow For Your Business

While profit can be a great way to measure the success of your business, 

 is essential to keeping your business running. And if you’re a product-based business, your inventory is one of the biggest factors for managing cash flow. It’s easy to tie up a lot of cash in inventory, and optimizing your inventory management process lets you keep enough free cash available for other operational expenses.

Having the right strategy to manage inventory will push your cash flow in a positive direction. It’ll help you keep the right products in stock, avoid excess inventory, predict cash flow, and understand the best time to order new inventory.

So, how do inventory and cash flow work together? Keep reading to find out.

Why cash flow is so important for businesses

Cash flow is the money that flows in and out of your business, reflected on your cash flow statement. Cash flows in from product sales, investment income, and asset sales—while it flows out through inventory purchases, interest payments, rent, and salaries.

Good cash flow means you can pay your bills and keep investing in growth. When you have money coming in and good cash flow projections, you can invest in product research, test product categories, research new designs, and build marketing campaigns.

Poor cash flow will impact your ability to operate and grow. Even if you have good 

, if you can’t reliably collect money from customers and other sources, you don’t have a predictable source of cash to cover expenses or re-invest. One late invoice payment means you may struggle to pay expenses and be unable to buy the inventory to sell to customers.

Inventory is one of your greatest assets as a product business. You need enough stock to fulfill orders, and if you run out, you run the risk of missing sales and losing customers—or at least losing out on customer satisfaction.

The problem comes when you don’t accurately predict how much inventory you need. Buying too little inventory saves money but increases the risk of out-of-stocks. If you purchase too much inventory, your company may tie up cash in products that sit on the shelf and may even need to be discounted to sell before they expire or go out of style.

Inventory optimization will help you maximize your company’s cash flow. You can use current 

and historical data to determine how much you can expect to sell monthly. This information will give you insight into the optimal inventory to buy to avoid running out or keeping too much in stock, giving you an ideal inventory level.

Inventory management tips for improving cash flow

So, now you know why inventory management matters for cash flow. What are a few ways to optimize inventory for better cash flow? Let’s take a look. 

One of the first steps to smart inventory management is understanding how much product you’re currently selling. Use your inventory management software to create a report covering how much of each product SKU you’ve sold.

You can use different timeframes to gather further insights—daily and monthly reports can help you see how effective your current advertising tactics are. Yearly reports will help you see trends over time and historical order volume during different points in the year.

Your goal is to determine how much inventory you sell each month. This number will help you determine how much inventory you need to order from suppliers and how frequently you need to order.

Track this data regularly and keep an eye on the reports to see trends and make smart decisions based on those changes. This will keep you from overstocking and understocking items that have changed in popularity.

As time passes, you’ll probably see a few of your products do better than the rest. These best sellers will generate the bulk of your company’s revenue. These are the products you’ll need to keep the most of in stock. They’re not only the SKUs you’ll sell most from day to day and the biggest risk for out-of-stocks, they’re also the least likely to cause overstocking problems, as you can sell through any excess quickly. If the 

 holds true (and it usually does), you’ll see 80% of your sales from about 20% of your products.

But that doesn’t stop some companies from stocking many products that underperform. Instead of varying their inventory stock levels for products that don’t sell well, companies still purchase too much, hoping an unpopular product will have future demand and sell more. Companies also consider bulk discounts and believe that saving money on inventory means their business is better off overall. But this isn’t always the case. 

While stocking up in bulk may give you a wider 

, it can cause more problems than it’s worth. More inventory can result in dead stock and excess products, which tie up your cash. You can’t pay the bills with extra widgets, so you often end up discounting them to bring in much-needed cash. Those products that don’t sell well will sit in your warehouse, wasting space, which also costs you money because you’re paying for more warehouse space than your business actually needs. 

Instead, focus on keeping inventory levels up for your best products and reduce the space used for storing inventory items that don’t sell well. Doing this will free up cash flow to experiment with other products or invest in other profitable business activities to fuel growth. (If you sell a ton of shoes but only a few pairs of socks, don’t tie up your cash by buying too many socks. That way, when black socks go out of style and red socks are the new trend (or your supplier gives you a great deal on shoes), you’ll have the cash to order what you need and won’t be stuck with inventory you can’t move.  When Thing 2 becomes the newest trend, you don’t want to be stuck with 1000 units of Thing 1 and no cash to stock up on Thing 2.)

How to calculate inventory turnover ratio 

While there are many granular ways to look at inventory, SKU-by-SKU, one great way to get an overall look at your inventory management is to calculate your inventory turnover ratio. Essentially, this ratio tells you how often you turn over your total inventory, on average, during a certain period. For example, if you measure the inventory turnover ratio for the full year, the ratio will show how many times you’ll sell through the entire stock in a year. A low number may indicate slow sales, but often indicates excessive inventory (i.e., stocking enough to last you months when you can easily restock more often). A high ratio, then, can indicate strong sales or possibly too little inventory on hand, if quick turnover leads to out-of-stocks. 

To calculate the inventory ratio, divide your COGS by your average inventory value.

Inventory Turnover = COGS / Average Inventory Value

This formula makes use of COGS for comparison, because inventory is recorded at cost in your accounting system. These are the costs directly attributed to manufacturing or acquiring the goods. Average inventory is calculated by simply adding your beginning and ending inventory for the period and dividing by two.

When optimizing inventory management, your ultimate goal is to minimize the amount of cash you have tied up in inventory. You want your inventory to sell quickly, giving you the cash required to buy the next batch of inventory for future customers.

This means reducing your order size as much as possible. You only want enough stock to satisfy your current customer demands without running out of stock before your next order.

Remember that this process can take time to get up and running, including dialing in:

Don’t be afraid to liquidate poor-performing products

As a business owner, you won’t always get it right when it comes to ordering or predicting trends. A new product may not sell as well as you expected, but that doesn’t mean the unsold inventory should keep haunting you for months to come. Liquidating old products will help you free up inventory space and generate cash flow for better-performing inventory. 

Your relationship with your supplier may be one of the most essential factors in helping you optimize your inventory management. When you start working with a supplier, there may be little trust. A supplier doesn’t know if you’re a good customer yet, so you may not get the best terms.

But as time passes and trust builds, you can start working to change those terms. One example of this is supplier lead times. Receiving your ordered products quicker will allow you to stock fewer products and have more confidence in maintaining a just-in-time inventory control system.

Net terms are another thing to negotiate with trusted vendors. Again, you’ll get standard terms to begin with, but you can ask to improve them as you build trust with the vendor. For instance, if you’re purchasing inventory on net 30 terms, and your supplier lets you increase to net 45, those additional 15 days can make a huge difference. 

Better terms are a big plus if you have a fast-selling product. You can quickly sell your inventory and pay some or all of your inventory and shipping costs without sacrificing cash flow. As your cash flow improves, you may also be able to get discounted terms by paying 

For instance, 2% 10 net 30 terms would give you 30 days to pay or a 2% discount if paid within 10. This is one way better inventory management and improved cash flow can also grow your profit margins. 

Many of the tips above have focused on avoiding excessive inventory. While tying up your cash in too much inventory is a huge problem, many businesses also struggle to have enough inventory to meet demand. Inventory financing can be the solution to accessing cash flow when you need it so you can order on time.

Improving your inventory turnover by keeping lower stock levels—especially on slow movers—and ordering just in time, you can give your cash flow a huge boost. By partnering with a working capital provider, you can accelerate that cash flow to keep you running smoothly through all the ups and downs of a product-based business. 

Having a financing partner in place, so you can access working capital quickly, on an ongoing basis, makes it simple to tap into cash flow when you need it.

While profit can be a great way to measure the success of your business, cash flow is essential to keeping your business running.

The right inventory management strategies can dramatically improve your cash flow. Find out how just-in-time ordering and inventory turnover impact your cash. 

Improve your cash flow through better inventory management 

How optimizing inventory management can improve your cash flow 

How Optimizing Inventory Management Can Improve Your Cash Flow

As a business owner, tending to your cash flow and profit is one of your highest priorities. You need both to have 

. Knowing these numbers will also help you understand your company’s performance and reach your goals.

Cash flow and profit aren’t the same thing, but it’s not uncommon for business owners to mix up the two. Unfortunately, doing so can lead to costly financial mistakes.

Here, we highlight the differences between profit and cash flow—and how to accurately analyze these metrics to guide your future decisions. The short answer? It’s possible to have cash flow without profit, and vice versa. Profit means your revenue is bigger than your expenses, leaving you with something at the end. Cash flow is all about timing. Even if you earn a profit, you can have negative cash flow if you haven’t collected the cash from those sales yet. Let’s take a closer look.   

Cash flow is money that flows in and out of a business from operating, investing, and financing activities. It’s not the amount of cash you have left in the bank after everything is said and done—it deals with the movement of cash during a specific period. 

So, why is cash flow important? Because you can’t keep your operations running without it. Vendors don’t want to see your P&L statement, they want to be paid, which takes cash.  

Let’s start by looking at the different cash flow types.

Operating cash flow is the money that comes and goes directly from the production and sales of goods from normal operations. It’s also called cash flow from operations and helps determine if your company has enough cash to cover all the bills. If you see a negative cash flow from operations, it’s a sign that you may not be able to sustain your business long-term.

A few examples of operating cash flow include:

, determine how much cash you received from sales and subtract your operating expenses paid in cash during that time. You can calculate your net operating cash flow monthly, quarterly, or annually, and you’ll want to keep an eye on it regularly to anticipate any issues.

Many companies invest in securities and make other investments related to their businesses. These investments allow companies to use surplus cash and create added cash flow to fund other parts of their businesses. 

Investing cash flow also includes investments in your core business, such as research and development. A negative cash flow from investments isn’t necessarily a bad sign—especially if the investments lead to growth.

Some examples of investing cash flow include:

Cash flow from financing is cash in and out from external financing, including borrowing and repaying 

, as well as infusion of cash from equity investors. 

Looking at cash flow from financing gives you a better view of how you manage your capital structure. You can see which parties (lenders and investors) are drawing cash away—which provides a starting point for reducing financing expenses (such as paying off high-interest debt). 

As you can see, investment and financing activities are an important part of running a business and can be crucial to optimizing your cash position. However, cash from these “irregular” activities can easily cover up the fact that your day-to-day business is actually operating with negative cash flow, which isn’t sustainable for very long. 

Profit is what remains of your revenue after covering certain expenses (which expenses you subtract depends on the type of profit you’re talking about; more on that in a minute). It has nothing to do with your total incoming or outgoing cash—just the difference between income and expenses.

Profits are distributed as payouts to business owners and shareholders or reinvested into the company through research, development, inventory, and marketing.

Several profit calculations can provide insights into your company’s financial health—and how each function of your business contributes to your company’s overall profit. Here are the three main types you should consider.

Gross profit is an essential financial metric that helps businesses understand their profitability. It is the difference between revenue from sales and the costs of goods sold (COGS), excluding other fixed costs like rent and salaries. Essentially, it tells you how much money you're making after accounting for the direct expenses that went into producing or acquiring the goods or services sold.

A positive gross profit gives you something to work with to cover your operating expenses, while a negative gross profit indicates that your business is operating at a loss, even before covering your cost of doing business. It's crucial to track your gross profit over time to ensure your business is making money, and to ensure you have a healthy margin to keep operating.

Calculating gross profit is relatively simple; it involves subtracting the cost of goods sold from total revenue. However, it's essential to ensure that the COGS is calculated accurately to obtain an accurate gross profit figure. COGS should only include those costs that are directly attributable to the production of your goods or services, not indirect overhead costs. 

For example, if you run a bakery, your COGS might include ingredients, cake boxes, direct labor costs for your bakers, and supplies like parchment paper. It wouldn’t include indirect costs like your rent, your marketing expenses, or the wages of employees not directly involved in baking, like your bookkeeper.

Operating profit is another crucial financial metric that tells you how much money your business is making from its core operations. It measures the profit generated by your business's operations after accounting for operating expenses, depreciation, and amortization.

Operating profit is useful because it shows how much money your business is making before considering non-operating expenses such as interest payments, tax payments, and asset sales. This provides a clear view of how much money the business is generating from its core operations and helps determine the effectiveness of your cost management strategies.

To calculate operating profit, you start with your gross profit and subtract those operating expenses you left out of the gross profit calculation—things like rent, utilities, administrative salaries, and marketing costs. 

Net profit, also known as the bottom line, is the profit that remains after accounting for all the expenses associated with running a business. It is the most comprehensive measure of a business's profitability, as it considers all revenue and expense streams, including taxes, interest payments, and asset sales.

Net profit shows how much money a business is making or losing after accounting for all expenses and provides a clear view of the business's financial health and profitability. It's essential to track your net profit over time to ensure that your business is profitable and to make informed decisions about allocating funds.

Calculating net profit involves subtracting all expenses from all revenue, including taxes, interest, and other non-operational expenses. A positive net profit means you have money left at the end of the year to invest in growing the business or reward owners for taking the risk of entrepreneurship, while a negative net profit means the business is losing money.

Cash flow and profit are both key ways of measuring financial health. However, they measure different aspects of a business's financial performance, and their importance depends on the business's current situation.

Cash flow measures the inflow and outflow of cash in a business, while profit measures the business's revenue and expenses. Cash flow is essential because it ensures that a business has enough cash on hand to pay its bills, meet payroll obligations, and invest in growth opportunities.

Profit, on the other hand, is important because it measures a business's overall potential to generate returns for the owner and is necessary to sustain the business in the long run. A business cannot survive on cash flow alone, and a sustained lack of profitability can lead to business failure.

Tapping into working capital to manage cash flow

Cash flow and profit work together to keep your business healthy both now and in the long run. Tapping into an external source of 

 can help you close any cash flow gaps to keep your business running smoothly and also enable you to invest in your company’s future growth and increased profitability.

 can be slow and clumsy when you need fast access to capital, and bringing in cash from investors can compromise your control and ownership. Alternative options like 

 can be the perfect solution, letting you access capital when you need it, based on your revenue and the health of your business.

As a business owner, tending to your cash flow and profit is one of your highest priorities. You need both to have healthy financials.

Understand the difference between cash flow and profit and how to use both metrics to run your business better.

Run your Business

Is a Merchant Cash Advance Right for Your Business?

How To Calculate Cash Flow For Your Business

How optimizing inventory management can improve your cash flow

What’s the difference between cash flow and profit, and why does it matter to your business?

How to scale your service business with Pipe

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How To Calculate Cash Flow For Your Business

How optimizing inventory management can improve your cash flow

What’s the difference between cash flow and profit, and why does it matter to your business?

How to scale your service business with Pipe

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