When you think of cash flow, you often think of revenue. However, understanding the differences in what each of these key performance metrics shows is critical for the business owner to understand and evaluate the financial health of their company.
Understanding the distinction between revenue and cash flow is key for you to feel confident your company is on track for success and is financially healthy.
What Is Revenue?
Revenue is the total income from selling products and services. Total revenue is recorded on your income statement.
Revenue is an excellent indicator of the ability of your team, advertising, and marketing efforts to generate sales. However, just looking at revenue alone doesn’t allow you to consider how much was spent to generate those sales and what a business’s net income is. To get a complete picture, when looking at revenue, an income statement should be prepared on a regular basis and reviewed by management. A profitable business should show that revenues are greater than expenses.
In addition to looking at the revenue, cash flow is another important key metric that should be looked at to provide more insight into your business’ financial health.
What Is Cash Flow?
Cash flow is the amount of money going in and out of a business. A cash flow statement shows how much money you have on hand at the end of a specific period and helps you understand liquidity. It is important for a business owner to understand where the money is coming in from and how it is being spent.
A cash flow statement will provide detail on how changes in balance sheet accounts and income affect the amount of cash that a business has available. The statement is broken down by operating, investing, and financing activities.
A cash flow statement helps you:
monitor your liquidity by letting you know how much cash you have so you know what you can afford for day-to-day operations;
assess business performance by identifying changes in your assets, liabilities, and equity accounts;
project future cash flows for business growth.
As a key metric, understanding cash flow is critical to your business’ financial health.
Comparing Cash Flow and Revenue
Just looking at revenue alone does not give a full picture of how well your business is doing. Revenue reflects sales success and is the top line on your income statement before taking expenses into account. Generating significant revenue does not always mean a business is profitable and has a positive cash flow.
Cash flow takes the information related to revenue further by starting with the net income of a business and then analyzing the cash inflows and outflows based on operating, investing, and financing activities.
To fully understand how well your business is doing and how it is positioned for funding future growth needs, you will need to be sure you are tracking both metrics.
Is Cash Flow or Revenue More Important?
Both are essential metrics for successfully running a business. Looking at revenue without considering cash flow doesn’t allow you to see the complete picture of how well your business is doing.
You must track revenues to understand how much money you are earning for selling your products or services. You can then use that information to help guide you in determining how to generate additional sales in the future. Revenue helps you build the income statement, which is required to create the cash flow statement.
At the same time, you need to understand what's going in and out of your business in terms of cash in order to understand the whole picture. The cash flow statement outlines every detail so you can see what is happening within your finances.
While generating revenue doesn’t ensure positive cash flow, and vice versa, the financial health of your business is reflected in each of these metrics. So be sure to regularly and thoroughly track each of them so you can make smart data-driven decisions to continually improve your business.
Want to Understand These Metrics Better?
Understanding revenue, cash flow, and the forces that affect them is key to understanding your business’ financial position.
If you’re looking to learn more about how cash flow and revenue drive your business, contact a trusted accountant, like SIMPLY Financials PLUS.
We’ll explain the difference between cash flow and revenue and show you how to properly measure each effectively, so you know where you stand and can make smart financial decisions to grow your business. Healthier financials could be just one call away.