Profit and Cash Flow

When planning the funding requirements of a business, it is more important to forecast what cash you are likely to need to run the business than to determine the profitability of the business.  That is not to say that profit, the difference between sales and costs within a specified period, is not a vital indicator of the performance of a business, but a profit does not necessarily guarantee the survival of a business. A profitable business can fail if there is not enough ready cash to run it. Goods might have been sold and delivered, but the customer may have been given credit and not pay immediately, whereas you may not have credit with all your suppliers and have to pay for your purchases, your staff salaries, electricity and other bills. Any business planning therefore has to take that cash flow into account and make sure that there is enough working capital.