Financial Objectives: Profit, Liquidity and Cash Flow

Financial objectives are the money-related goals a business sets to help it survive and succeed. Profit, liquidity and cash flow are different objectives: a business can meet one while struggling with another.

Profit

Profit is the amount left when costs are deducted from revenue. A business might aim to increase profit so it can reward its owners, reinvest or build reserves. Profit shows whether the business is earning more than it costs to operate, but it does not tell you how much cash is available right now.

Liquidity

Liquidity is a business’s ability to meet its short-term payments when they fall due. These might include wages, rent and payments to suppliers. A liquidity objective is to keep enough cash, or assets that can quickly be turned into cash, to cover those obligations. A business with valuable equipment or strong sales may still have poor liquidity if it cannot pay its next bill.

Cash flow

Cash flow is the movement of money into and out of a business over a period. Cash inflows include customer payments; cash outflows include payments for stock and wages. A business may aim to maintain positive net cash flow, meaning more cash comes in than goes out during that period. It may also plan for periods when outflows will be higher.

For example, suppose a business makes a sale on credit for £10,000\pounds 10{,}000£10,000 and incurs costs of £7,000\pounds 7{,}000£7,000, which it pays immediately. Assuming no other costs, it makes £3,000\pounds 3{,}000£3,000 profit. But until the customer pays, that sale has brought in no cash, while £7,000\pounds 7{,}000£7,000 has gone out. The business could struggle to pay other bills despite being profitable.

The key exam mistake is treating profit as cash. Profit measures earnings; cash flow tracks payments; liquidity asks whether the business can meet its short-term obligations.