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How Does Profit and Production Cost Affect the Business?

Profit and production costs affect your business by having a strong influence on cash flow,
and also on the overall health of your company's business model. The more revenue you
generate and the less you spend, the greater the amount of revenue you'll have for
financing day-to-day operations and also for paying yourself. Although the link between
profit and cash flow isn't always direct -- you might have money coming in that you must
use to pay off old debts -- if your business is earning a profit, it will most likely be just a
matter of time until you have the working capital you need.

Production Cost

Production costs are expenses, such as materials and labor, that your company
incurs in the course of producing the product that you sell to consumers. In
general, the lower your production cost, the higher your profit, or the amount you
have left over after you subtract your expenses from your sales revenue. However,
low production costs do not necessarily guarantee a high profit. Your business may
have unsustainably high fixed costs, such as rent, or may cut production costs to
the point where you're producing an inferior product that nobody wants.

Profit

Profit is the amount that your business ultimately earns, after subtracting expenses,
such as operating costs from gross revenue. Earning a healthy profit is essential to
the healthy operation of any business. Profit provides you with the money to pay
your expenses, pay yourself and pay off debts and invest in growing your company.

Cash Flow

Cash flow is the amount of money that your company has available to cover its
operations. The lower your operating costs, the less of a bite they will take out of
your cash flow. Profit has a beneficial effect of cash flow, providing you with
working capital to pay your employees, rent, taxes and materials costs.