Having cash means turning a profit, right? Not necessarily. On today’s episode of Food For Mzansi TV, we chat to Bertie Hamman, senior manager of agribusiness at Standard Bank, about the crucial differences between profit and cash flow, and how both need to be used if you want your agribusiness to become a success.
Turning a profit vs. having a positive cash flow
It may sound very simple to “farm profitably”, but all farmers and agripreneurs know that this isn’t always the case. Where most people trip up is thinking that profit and cash flow are the same thing. Profit, in its simplest form, is if your income is more than your expenses, whereas cash flow is the difference between all the money you received and all the payments that went out.
In a typical farming venture, it’s highly unlikely that your profit and cash flow will be the same, because farmers typically need to take out loans for assets and pay back loans with interest. Be sure to check out the video above because Hamman also specifically weighs in on this important matter.
Can I turn a profit, but be cash flow negative?
Yes, it is definitely possible. Taking out loans can have a large effect on cash flow without impacting profits. If you take a bank loan today, you get cash, and that would improve your cash flow, but that won’t increase your profits right now. Much like this example, there are many ways that your cash flow or your profit could be affected, without affecting the other.
What’s more important: profit or cash flow?
Don’t make this mistake. Both profit and cash flow are equally important if you want your business to succeed. Farmers need to generate a profit in order to be sustainable, but without a positive cash flow, you won’t be able to manage your farm successfully. Hamman has some great recommendations for finding a balance between being profitable and being cash flow positive to ensure business success.