May 26, 2026 l Manila Bulletin
In many sari-sari stores, a familiar sign reads: “Your credit is good, but we need cash.” While it may sound humorous, this statement reflects a practical truth in the business world—whether for a small enterprise or a large conglomerate: cash flow determines a business’s survival.
Profit may look impressive on paper, but cash flow dictates whether a company can survive long enough to sustain its operations.
Under accrual accounting, sales are recognized even if customers have not yet paid. Meanwhile, cash can be tied up in unsold inventory while obligations to suppliers are already falling due.
Businesses also regularly acquire property, plant, and equipment. However, only depreciation is deductible from revenue, even though a significant amount of cash may have already been spent on equipment, office upgrades, leasehold improvements, and other fixed assets. If these assets are purchased with cash, they can severely strain cash flow even when profits appear healthy.
Similarly, if a loan is obtained to finance these fixed assets, only the interest expense—not the principal repayment—is deductible from revenue. As a result, an income statement may show an attractive bottom line while cash flow is already under pressure due to improper management.
This is why savvy investors do not merely analyze the statement of income and expenses. Before investing, they closely study the cash flow statement, liquidity ratios, and other financial indicators. Even ordinary depositors evaluate the financial health of banks by looking at liquidity, capital adequacy, asset quality, profitability, and efficiency measures.
Whether managing a small business or a large corporation, it is vital to prepare projected cash flows and track the timing and direction of cash outflows. A company may invest heavily in real estate and report impressive profits, but it must still ensure it remains liquid enough to meet immediate obligations and operational cash requirements.
For day-to-day and month-to-month survival, the old adage holds true: “cash is king.” However, long-term sustainability still depends on profitability.
Businesses with lower receivables and stronger cash collections generally stand a better chance of surviving. They must closely monitor how cash is utilized to ensure efficient use of inflows, but sustained profitability remains necessary for long-term growth.
Conversely, some businesses that do not maintain proper accounting records rely solely on available cash to make decisions. While this might address immediate concerns, it limits the long-term strategic planning that proper profit analysis provides.
Ultimately, there must be a healthy balance. Businesses that properly manage both profit and cash are more likely to maintain financial health and resilience. Cash preserves liquidity, while profit creates opportunities for expansion and wealth creation. Maintaining sufficient liquidity to meet urgent obligations while remaining mindful of profitability simply makes good business sense.
The well-known 50/30/20 rule in personal finance can be adapted for business use. While this framework is merely a starting point and should be customized to an enterprise’s specific needs, it can be particularly useful for small and medium enterprises (SMEs) that do not yet have sophisticated budgeting systems. This approach helps align both cash management and profitability goals.
Under this adapted framework, 50 percent of cash is allocated to essential, non-negotiable expenses such as payroll, rent, utilities, and core operating costs, as keeping these within manageable levels helps control overhead. Another 30 percent is allocated to growth and innovation—expenses that generate future revenue, such as technology upgrades, employee training, professional development, and marketing promotions. The remaining 20 percent serves as a financial buffer for emergencies, loan repayments, taxes, and contingency planning.
Of course, businesses should modify these allocations depending on their industry and operational requirements. Some sectors, for instance, may require a higher allocation for essential operating expenses. The framework must remain flexible and adaptable. (Source: Store1UB, June 13, 2025)
In the end, which is more important—profit or cash?
Neither is superior to the other; businesses strictly need both. Cash flow reports support day-to-day survival, budgeting, and liquidity planning, while profit reports measure overall financial health and long-term viability. A business that manages both effectively is the one that will achieve lasting stability, resilience, and sustainable growth.
***The views expressed herein are her own and do not necessarily reflect the opinion of her office as well as FINEX. For comments, email wimiranda@inventormiranda.com. Photo is from Pinterest.