Profit and cash flow are considered to be essential elements for managing a healthy business. However, profits deals more with making money, while cash flow focuses on managing money within an organization (Foerster, Tsagarelis, & Wang, 2017). For instance, profit is given by the difference between revenue and expenses incurred by an organization in achieving a particular level of output. If the difference is positive, the company experiences profits reflecting the healthy growth of the business. On the other hand, cash flow focuses on inflows and outputs. An increase in revenue may be accompanied by an increased level of debt that increases the level of outflow. Therefore, cash flow differs from profit in that it takes into account the impacts of debt.
Understanding profitability and cash flow are essential in business as they help leaders in the decision making the process. For instance, if a company seeks to understand its creditworthiness and ability to attract investors to finance the company or banks to give loans, there is a need for maintaining a profitable business operation (Ball et al., 2016). Cash flow plays an essential role in helping leaders to determine if they are capable of making additional investments or not. The decision to expand business depends on the performance of current brands. Positive cash flow favors further investment in an organization.
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As a technology manager, I will focus on keeping an eye on profit as the key driver for an organization. High profits indicate that a company is operating to meet its financial requirements (Foerster, Tsagarelis, & Wang, 2017). Therefore, technology can play an essential role in minimizing operational costs to maximize revenue at low expenses, thus increasing profit margin. For example, mechanization reduces the number of employees needed to perform a particular role, thus reducing wages, which contribute to a decline in operational costs.
References
Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2016). Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics, 121(1), 28-45.
Foerster, S., Tsagarelis, J., & Wang, G. (2017). Are Cash Flows Better Stock Return Predictors Than Profits?. Financial Analysts Journal, 73(1), 73-99.
