Revenue vs Cash Flow – the FactsWritten by Mindaugas on September 24, 2018
You know those pictures where you either see two faces or a vase? Your financial statements can be a lot like that. What you see and take away is based on perception and your knowledge of the concepts.
While ambiguous images were designed to test perception, financial statements often test your patience. Especially when so many terms and concepts sound nearly identical, even when they’re not. One specific example is the difference between revenue and cash flow.
What is Revenue?
Revenue is the amount of money that a company earns from the sale of goods and services. It’s that simple, it only measures the total income from sales. You’ll often hear revenue referred to as the “top line” because it’s listed at the top of the income statement (also called a profit and loss statement).
Since we started this discussion talking about art, let’s say your business is producing high-quality prints of contemporary art. Your revenue is the amount you earned from selling your prints to distributors, retailers or directly to customers.
How is Revenue Different from Profit?
While revenue is recorded in your profit and loss statement, what makes revenue different from profit is that revenue doesn’t take in to account any of the expenses incurred in producing the goods and services sold.
Profit, also known as the “bottom line” of the income statement, is what you get once you subtract all the expenses that went into making and delivering the prints to your customers. And even though profit takes expenses into account, it still doesn’t provide the same information as measuring cash flow.
While revenue and profit give you top and bottom of the line information that tells you if there’s actual demand for your products and services — they don’t show you how and when the funds are actually coming in or leaving your business. And that’s a rather important piece of the picture that you need to see.
What is Cash Flow?
While revenue and profit are measures of income, cash flow, the amount of money moving in and out of your business over a specific period of time, determines your liquidity.
Although liquidity might make you think of things like water or something squishy, the actual definition is not the least bit touchy-feely. What liquidity, or having the right amount of cash flow, really means is your ability to come up with the cold, hard cash to meet your short-term financial obligations. These are commitments like paying your employees, vendors and covering the tab for that fancy new digital printing system you just bought.
Cash flow, recorded in a cash flow statement, is like taking the pulse of your overall financial health. Any irregularities warrant investigation.
Revenue vs Cash Flow – How are They Different?
The main thing that separates revenue from cash flow is how each metric is recorded. Revenue is often tracked as it’s earned (or accrued), regardless of whether or not you’ve received payment. Conversely, cash inflows aren’t counted until your home decor customer pays for the 5,000 prints destined for retail centers across the country.
Revenue is fairly one dimensional. You make a $100,000 sale, you record $100,000 in revenue. What you don’t see is whether or not the purchaser pays the invoice in full or how much it actually costs you to make and deliver these goods.
$100,000 in positive cash flow is different. Cash flow tracks both inflows and outflows — it’s a slow-motion replay of your financial performance. If you’ve got $100,000 in positive cash flow, this means you’re bringing in $100,000 once all your regular expenses are paid.
What cash flow shows you that revenue can’t, is whether or not you’re rolling in dough, breaking even or about to sink into massive debt. A $100,000 purchase order is just a purchase order. For instance, what if after the ink dries on your deal, the cost of ink for your printer skyrockets? You might have $100,000 in revenue but nearly double that amount in production costs.
The reality is that revenue and cash flow paint two completely different pictures.
Can I be Earning Revenue and Still Lose Money?
It is entirely possible to be earning revenue while losing money. In fact, a business undergoing a period of high growth might experience just that because they’re reinvesting or taking on financing in order to accommodate this growth. In this scenario, the revenue numbers look great, but the cash flow statement will show the deficit. (Of course, the long-term play would be for the company to bring in more money than it pays out.)
Discrepancies between accounts receivable and accounts payable can also cause a business to be cash flow negative even when sales are stable or strong. Again, the income statement would show positive revenue. However, the cash flow statement would tell a completely different story.
If a customer invoice isn’t paid, it can’t be counted as cash flow. Even if the customer pays on time, if you’ve given them three months to pay when your creditors want you to pay them one month from now, you’ve got a cash flow problem. In additional to unfavorable terms, late payments also wreak havoc on cash flow. There are many moving parts to cash flow and you need to know which gears are running smoothly and which ones are out of sync.
Seeing the Big Picture
Although testing to see if you notice the faces or vase first is a conversation starter on perception and cognition, learning to understand and interpret your financial statements is imperative to the survival of your business.
If you can see the spacecraft between all the dots in a Magic-Eye-inspired print, fantastic. If you can predict a potential cash flow shortfall and keep your business on track, even better — and somewhat more practical.
Make sure you see what needs to be seen. Produce and review your financial statements on a regular basis. Work with an accountant who understands your business and its needs. And use tools, like PayPie’s cash flow forecasting, to turn your financial data into actionable insights.
Our guest post today was written by Michelle Mire. Michelle Mire is the content writer and strategist at PayPie, which offers near-real-time cash flow forecasting. She enjoys helping businesses understand the importance of cash flow.