This is a comprehensive guide to understanding the difference between cash flow and revenue.
In this guide, you will learn about revenue and cash flow, their differences through examples, and much more.
So don’t waste your time and dive into the article.
How cash flow vs revenue is different
Many of us tend to think that these two words are similar and not much different, but that’s not correct.
Revenue shows how much you earn from services and goods, whereas cash flow represents liquidity, showing how much cash is coming in and going out of your company.
It’s possible for cash flow to become negative, but revenue never goes into negative territory.
Earning revenue doesn’t always mean an increase in cash inflow. Both are connected and important for a healthy business, so it’s essential to understand them deeply.
What is revenue
Revenue is the earnings of a company coming from its core operations, such as sales. Some firms have multiple revenue sources. For example, Samsung’s main revenue comes from selling mobile devices, which is its core operation.
On the other side, it may earn through renting its assets, issuing stocks, and bonds. These revenues are called secondary and are also calculated in the income sheet.
However, they are highlighted as non-operating revenue since they don’t come from the company’s core operations.
Remember, different organisations have different revenue sources and numbers.
- Banks earn from only interest
- Governments earn from taxes and selling assets
- Real estate earns from rental properties and commissions.
How clients and customers pay is also impacts on revenue. Let’s understand more.
Accrued revenue
Accrued revenue is when a sale is generated, but it can’t be paid by customers. When an organisation generates sales, it doesn’t mean cash is coming to its account right away because sometimes people take 30 or 60 days to pay their invoices.
For example, if you sell mobile devices to your client on the 1st of June and send the invoice by email, they might say they will pay the bill on the 30th of June.
This situation affects cash flow in the long term when you have revenue on the sheet but not cash in hand.
Unearned revenue
Unearned revenue is the opposite of accrued revenue. It occurs when customers prepay for services and goods that are not yet delivered.
For example, if you prepay your internet bill for 2 or 3 months in advance but haven’t received the service yet, it is categorised as unearned revenue.
Now let’s move on to the next chapter…
What is cash flow?
Cash flow is the net amount of how much cash is coming into a firm minus how much cash is going out. In other words, it’s just cash earned minus cash spent.
Net cash flow = cash inflow – cash outflow
Cash flow doesn’t calculate when you just generate sales; it needs cash in the business account, no matter how it comes.
Cash flow is two-way, it can become positive or negative.
Generally, positive cash flow means good health for the business, while negative cash flow means you are spending more compared to your earnings. However, it’s not always straightforward due to some reasons which we will discuss later.
Cash flow includes many things; that’s why it has a separate statement called the cash flow statement. Other two statements are the income statement and the balance sheet.
Revenue is written on the top of the income statement, which is why it is called the top-line number, and net income shows on the same sheet at the end, which is why it is called the bottom-line number.
The cash flow statement starts with net income, and after that, activities will be added and subtracted from that.
These activities are decoded into three parts:
- Operating activities
- Investing activities
- Financial activities
Let’s learn a little about each of them.
Operating activities
As I mentioned earlier, most of a company’s revenue comes from its core operations. So, the cash coming from its core operations and spent on them is called cash flow from operating activities.
When Samsung sells mobile devices, and cash comes from the clients, it is operating cash and is recorded in that section. This section also includes expenses such as paying for raw materials, rent, and salaries for employees.
Normally, current assets and current liabilities, which are usually short-term items, are included in operating activities. Accounts receivable and payable can also be seen in that section.
Investing activities
Cash inflow and outflow generated by a company’s investing activities are included in this category. In other words, when a company invests money in long-term items or sells its long-term assets, it is called investing activities.
For example, when Samsung invests its money to build a manufacturing plant in India, or when it buys equipment and property, it will be included in this section. On the opposite side, selling buildings, land, or vehicles will also be concluded as investing activities.
Financial activities
All of the company’s financial activities are located in this section. An organisation finances its business in different ways.
When a company finances its business by taking a loan, issuing stocks, or bonds, all of these are shown as cash inflow. On the other hand, when it repays a loan, repurchases stocks, or pays dividends, all of that is included as cash outflow.
Now that you know in-depth about cash flow and revenue, let’s move on to the next part and see the real difference between them.
What is the difference between cash flow and revenue
Cash flow is found in the cash flow statement, while revenue is found in the income statement, also called the profit and loss statement.
Revenue is added whether cash is paid by customers or not, while cash flow is only added when cash comes or goes from the account.
Revenue has two types: accrued and unearned, while cash flow has three types: operations, investment, and financial.
Revenue is one-way; it can only become positive, while cash flow is two-way; it can become positive and also negative.
Revenue is shown at the top of the income statement, which is why it is called the top-line number. After subtracting other expenses, such as raw materials and taxes, you will get net income at the end of the same sheet. That’s why net income is called the bottom-line number.
The cash flow statement starts with net income at the top of the sheet. This is why we need net income to calculate cash flow. After adding and subtracting all cash activities, we will get the net cash flow of our organisation. It shows how much money we have at the current time.
Now it’s time to understand with an example.
Understand the difference with an example
Let’s assume a washing machine manufacturing company sold a total of 10 machines in June. So, your revenue will be generated by sales multiplied by the price. But the twist is that only half of the customers paid to buy the machine; the rest are on credit with 30 days to pay. So, here cash is coming from only 5 people and Revenue generated from 10 people.
Sometimes this type of condition creates a cash gap. Here, people take the machine on credit, but the manufacturer needs money to pay its raw material supplier. But possibility is, it doesn’t have enough money at hand.
Profit vs. cash flow vs. revenue
Another term that people often confuse is profit. Profit is nothing but revenue minus expenses. Net income means net profit, which we get after subtracting all expenses from revenue.
Remember, net profit is also different from cash flow, and both can affect each other. Normally, high profit means high cash flow, but it’s not always true.
If a lot of money is pending in accounts receivable, you may face cash shortages for the short range. Another example is if you take a business loan, then your cash flow may be higher compared to profit, but it affects your company in the long term.
Now let’s take a closer look at their importance.
Which is more important
The business world doesn’t have a single metric that tells you about a company’s health. You will need some parameters to find out what position the company is in, which is why both cash flow and revenue are important.
Tracking how much sales generate and how sales will grow in the future, then obviously revenue works. But when you need to invest money or track how much cash the company has, then cash flow is needed.
Using both of them, we can find a better position, along with other factors such as net income and different types of ratios also useful.
HERE, I suggested some tools for your business help.
Finmark: Using this, you can not only track your history of cash flow and revenue but also forecast your company’s future. So with this data, you can easily beat future problems and get better results.
Wise: Wise is a payment system that you can use in business. Giving access of Wise to employees and managers allows easy and fast payments.
Digital Ocean: This platform provides cloud storage and infrastructure as a service (IaaS).
Conclusion
Here I conclude my comprehensive guide on cash flow vs revenue.
Remember, knowing the difference between revenue and cash flow leads to making better decisions to manage your finances effectively.
To secure a brighter financial future, explore more of our insightful articles.