Introduction
Cash flow and revenue can appear similar, but they’re quite different.
Revenue represents the total income earned, cash flow measures the net amount of cash being transferred in and out of a business.
This guide should help you understand the differences. It’s also related to our articles on understanding gross vs. net profit, operating income vs ebitda, and how to read a cash flow statement.
This list includes:
- Cash flow vs. revenue
- Cash flow vs. profit
- Revenue recognition criteria
- Operating vs. non-operating revenue
- Direct and indirect cash flow
Let’s dive in!
Definition of revenue
Simply put, revenue is the total money you make from doing what your business does best, whether that’s selling products, providing services, or both. It includes any form of payment you receive, like credit card payments or checks.
Types of revenue
- Operating: This is the cash you make directly from your primary business activities. Think about sales of your products or payment for your services.
- Non-operating: This cash comes from the sidelines – sales not central to your business. It could be interest from money in the bank, or an old piece of equipment you sold.
Definition of cash flow
Cash flow can be (and usually is) affected by revenue, but it measures something different; the cash that’s coming in and going out of your business.
Components
- Operational: Cash from your day-to-day business operations. This is from selling your products or services.
- Investment: Cash spent or received from buying or selling assets, like equipment or property.
- Financing: Cash from or for loans, and investments into your business, including what you put in or take out as the owner.
Cash flow statement overview
The cash flow statement is a report that shows where your money’s coming from and going. It breaks down cash flow into three parts: operational, investment, and financing activities. It’s a snapshot of your business’s financial health, showing if you’re generating enough cash to meet your obligations and grow your business.
Comparison of cash flow and revenue
Revenue is about earning; it’s the total income from sales or services before any expenses are subtracted. You recognize revenue when a product or service is delivered, not when the cash is received. This means you could make a sale today and count it as revenue even if you won’t see the cash until later.
Cash flow, on the other hand, is all about the actual movement of money in and out of your business. It’s recognized only when the cash is exchanged.
You could have a high revenue on paper, but if that cash hasn’t made its way into your bank account yet, your cash flow could tell a different story.
How revenue can impact cash flow and vice versa
The relationship between revenue and cash flow is a bit like a feedback loop:
- Revenue impacting cash flow: High revenue can lead to high cash flow, but this isn’t a given. If customers are slow to pay, your revenue numbers could be impressive while your cash flow suffers.
- Cash flow impacting revenue: Strong cash flow means you have the money available to reinvest in your business, whether that’s buying inventory, investing in marketing to attract more customers, or even researching and developing new products or services. In this way, good cash flow can fuel activities that lead to increased revenue.
Despite their differences, both metrics are essential for different reasons.
Revenue is a good indicator of your business’s market demand and operational success. It tells you if your offerings are hitting the mark with customers.
Cash flow, on the other hand, is a critical measure of your business’s liquidity and short-term viability. It answers the question: “Do I have enough cash on hand to keep
It’s not enough to just make sales; you need to manage the cash from those sales efficiently. Similarly, maintaining healthy cash flow without growing revenue can indicate that your business is not expanding or reaching its full potential.
Balancing the two is the art and science of business financial management.
How revenue shows up in the cash flow statement
When you look at your Profit and Loss (P&L) statement, the top line shows your revenue or sales. This figure represents the total amount of money your business brought in during the period.
But how does this number translate into actual cash in your business’s bank account? That’s where the Cash Flow Statement comes in.
Let’s assume your P&L operates on an accrual basis. This means it records revenue when it’s earned, not when the cash is actually received. For instance, if you invoice a client in March, the sale goes on your March Profit & Loss, regardless of when you get paid.
However, the Cash Flow Statement works differently it tracks actual cash movements. So, it records the inflow of cash only when you receive payment from your client.
The Cash Flow Statement adjusts your reported profit to reflect what cash has genuinely entered or left your business.
Forecasting revenue vs cash flow
When you forecast revenue, you are looking at the potential sales you expect to make within a specific period. This includes all income from your business activities, whether cash sales or credit sales that you haven’t received cash for yet.
Cash flow forecasting, on the other hand, is focused more on the timing of when money enters and exits your business account.
Key differences in approach
When you prepare a revenue forecast, you base your predictions on sales trends, market conditions, and business initiatives like marketing campaigns. It’s more about the ‘top-line’ growth and doesn’t directly take into account when cash will be available.
For cash flow forecasting, you need to dig deeper into the timing of each cash movement. You have to consider when customers will pay you, when bills are due, and how this timing affects your ability to cover costs and invest in growth opportunities.
Why timing matters
In cash flow forecasting, timing is everything. Even if your revenue forecast looks great, it doesn’t help much if your incoming cash is delayed and you can’t pay your immediate bills.
This is why cash flow forecasts need to be more detailed, considering different scenarios like late payments from customers or unexpected expenses.
- Revenue forecasting: Use historical sales data, adjust for seasonal trends, and factor in new products or markets. Tools like sales trend analysis and market research can help here.
- Cash flow forecasting: Start with the opening bank balance, add expected cash inflows, subtract anticipated outflows. You’ll need detailed records and perhaps tools like cash flow management software to get this right.
Practical forecasting scenarios
Scenario 1: Late payments. You expect to sell 20% more next quarter because of a new marketing campaign. But what if 30% of your customers take an extra 60 days to pay? While your sales numbers look good on paper, you won’t have that cash in your pocket just yet. This means you might run short on cash to cover daily operations. To avoid a crunch, think about getting a short-term loan to cover expenses until the money comes in.
Scenario 2: Yearly subscriptions. Let’s say you start offering a service where customers pay upfront for the whole year. This money counts as deferred revenue, which means although you get the cash now, you can’t count it all as today’s income. You’ll recognize it little by little over the year. This is great for your cash flow right now, but remember, that money needs to last and cover costs throughout the year as you earn it on your books.
Scenario 3: Customer deposits. Imagine you make custom products and ask for a 50% deposit before you start working. These deposits boost your cash on hand right away, which helps pay for materials and other upfront costs. But keep in mind, this isn’t your money yet—not until you finish the work. It’s important to not spend all this at once since you’ll need to account for it as you earn it by finishing and delivering products.
Common challenges and solutions
Balancing cash flow and revenue growth can feel like walking a tightrope for small businesses and startups. Here are some common hurdles and how to clear them.
Challenge 1: Rapid expansion vs. cash flow management
Growing too fast can strain your cash resources. You might ramp up marketing, hire more staff, or increase inventory, expecting higher revenue. But if the incoming cash doesn’t keep pace, you could hit a wall.
Solution: Pace your growth. Use forecasting to project both your cash needs and expected revenue from expanding. Test small before going all in, whether it’s entering a new market or launching a product.
Challenge 2: Unpredictable cash flow
Many small businesses face seasonal fluctuations or unpredictable customer demand, making it hard to plan and maintain a healthy cash flow.
Solution: Build a cash reserve during your peak periods to cover you in the slow ones. Diversify your offerings to attract a broader customer base and smooth out the peaks and valleys in your cash flow.
Challenge 3: Late payments
Waiting on payments can tie up your cash, making it hard to cover expenses or invest in growth opportunities.
Solution: Tighten up your invoicing process. Offer multiple payment options, send invoices promptly, and follow up on late payments. Consider early payment discounts or enforce late payment fees to encourage quicker turnaround.
Challenge 4: Financing growth
Sometimes, to grow, you need an influx of cash that sales alone can’t provide—at least, not quickly enough.
Solution: Explore different financing options. Traditional loans, lines of credit, and even crowdfunding can provide the necessary capital. Choose the option that makes the most sense for your business, considering repayment terms and interest rates.
Conclusion
Cash flow, the money that flows in and out, acts like your company’s lifeblood, keeping operations running smoothly.
Meanwhile, revenue, your total income before expenses, reflects the effectiveness of your sales efforts.
It’s crucial to monitor both to ensure your business remains healthy, as overlooking one can lead to missed growth opportunities or financial difficulties.To make your business thrive, stay informed, continue learning, and refine your financial practices.
Next, check out our articles on how to read a balance sheet, understanding journal entries in accounting, and bookkeeping 101: a guide to bookkeeping basics.
FAQ: Cash flow versus revenue
Here's some answers to commonly asked questions about Cash flow versus revenue.
What’s the difference between cash flow and revenue?
Revenue represents the total income generated from business activities before any expenses are deducted. It’s the gross amount your business earns from its goods or services.
Cash flow, on the other hand, is the net amount of cash moving into and out of a business over a specific period. It reflects the company’s ability to generate enough cash to cover expenses and reinvest in its operations.
While revenue can show how well a business is doing in terms of sales, cash flow provides insight into the business’s liquidity and financial stability.
Can high revenue guarantee positive cash flow in my business?
Not necessarily. High revenue indicates your business is selling a lot of goods or services, but it doesn’t always ensure positive cash flow. This discrepancy occurs because revenue is recorded when a sale is made, not when the cash is actually received.
If customers take a long time to pay, your business might face a cash crunch despite showing high revenue. To maintain a healthy cash flow, it’s important to manage receivables effectively, encouraging prompt payment through incentives or penalties for late payment.
Why do I need to balance attention between cash flow and revenue?
Neglecting either aspect can lead to financial difficulties. Focusing solely on increasing revenue without ensuring adequate cash flow can result in operational hiccups or even bankruptcy if expenses cannot be met. Conversely, concentrating only on cash flow without seeking revenue growth might hinder expansion opportunities. Balancing both ensures your business not only survives but thrives, adapting to changes and seizing opportunities for growth.
