Cash Flow vs Revenue: What’s the Difference?
Cash flow vs revenue — it’s a crucial yet sometimes subtle and misunderstood distinction for business owners just getting started or getting their financial houses in order. But these closely related concepts lie at the heart of every for-profit organization or company.
So read on as we explore the bottom line of cash flow, revenue, and how they work together to fuel your business.
What is Cash Flow?
Cash flow is much what it sounds like. It’s the movement (flow) of money in and out of your business.
It can be split into its constituent parts, the first of which is your cash inflow from doing business and other sources, which we’ll touch on more shortly.
The second is cash outflow, which is the money your company spends on materials, salaries, and other expenses incurred to stay open and operate. The net result of these is what’s generally thought of as cash flow.
A company’s cash flow is typically laid out in a cash flow statement. This important financial document provides more details about the nature of cash flow and is split up into three categories:
- Operating cash flow (from normal business activities)
- Investing cash flow (like property and equipment)
- Financing cash flow (such as paying interest on debt or dividends to shareholders)
What is Revenue?
Revenue is a key component of cash flow. It represents the total money generated from a business’s normal, primary operations, though sometimes additional income streams can be included. It’s sometimes called the “top line” because it’s the starting point from which net income (the “bottom line”) is generated.
Importance of Cash Flow and Revenue
Cash flow and revenue are among the most critical numbers to the success of your business. Revenue can be one of the most direct ways to observe the success or struggles of a company from a volume perspective.
However, it’s vital to remember that revenue doesn’t take into account the costs associated with generating that income or any other business expenses. Proper cash flow is also a good sign a company will be able to pay its bills and invest in future growth.
Cash Flow vs Revenue
Cash flow can be one of the most important signs of the financial health of a business, including whether it’s doing a good job collecting from customers.
It can be either positive or negative. Here are a couple of examples to help you get a better picture:
- A growing company with excess overhead expenses will have a negative cash flow.
- A more mature company with a strict budget and its initial expenses are taken care of, that is bringing in plenty of cash, will likely have a positive cash flow.
From these examples, it’s important to realize that a company with impressive revenue and profit numbers can still have a negative cash flow if it is overspending.
As for revenue, it’s typically a good thing to see it increase as much as possible. However, it’s vital to keep expenses in mind and ensure you’re not spending as much or more to generate your business as you’re making from it. Because, in some cases, companies can lose more money as their revenue increases.
Key Differences Between Cash Flow and Revenue
There are a few key differences between cash flow and revenue. Revenue will almost always be positive, while cash flow can go either way for the reasons explained above. But there are also less obvious distinctions that can majorly impact your accounting and bookkeeping.
Revenue is recognized in your books at the moment a sale is made. However, the cash flow associated with that sale could come days or weeks later or even before the sale for customers with a credit.
Certain expenses are commonly claimed by businesses for financial reasons that don’t actually require any cash outlay at the time. The most common are amortization and depreciation, which reflect the decreasing value of equipment or property that owners can consider an expense for tax reasons. These will show up on cash flow statements but won’t impact revenue.
Managing Revenue and Cash Flow
While business and management experts spend lifetimes learning the secrets to improving the cash flow and revenue of prominent corporations, the basics can be surprisingly straightforward.
For one, having an experienced and capable financial professional in charge of managing accounts receivable and accounts payable can go a long way toward straightening out inconvenient delays or payment hiccups.
Managers can also look to optimize inventory levels. For example, you can free up valuable cash by only buying the inventory you’ll need for the foreseeable future rather than sinking too much money into products that just sit on the shelf.
In addition, technology has provided some major benefits to businesses on this front. New apps like Venmo or Cash App make sending and receiving payments easier and faster than ever, as do portable credit card terminals and the ability to update and maintain your books in the cloud, accessible wherever you are.
Maximize Cash Flow and Revenue with the Help of an Experienced Accounting Partner
While there are critical differences in reporting and managing cash flow vs revenue, it’s undoubtedly true that both are among the most essential accounting and financial concepts for any business owner to understand.
However, many business owners would prefer to spend time doing the work they love instead of combing through financial statements.
If this sounds like your company, PlotPath can help. Contact us today to learn more about our business booking, financial advising, and other accounting services and see how they can give you a much-appreciated boost.