Few topics about business finances cause as much confusion and frustration as cash flow and revenue. On paper, your business might appear to be pretty profitable. But then why are you still struggling to pay bills and fund business growth? Itโs because cash flow and revenue measure completely different things. Both are handy financial metrics, but they tell different parts of your companyโs financial health story.
Hereโs how to make sense of the differences between cash flow and revenue, as well as how to use both to make smarter business decisions.
What is revenue?
Revenue โ aka gross revenue, net sales, income generated, etc. โ is the total money generated by your usual business operations during any given period. Itโs then recorded on your income statement or profit and loss statement.
In simple terms, revenue is what your business earns before taking out business expenses, which might include sales revenue from products or services, as well as other streams like rental income or interest income.
Hereโs an example: if your business sells $20,000 worth of goods in May, thatโs your gross revenue. If you offer discounts or refunds, they are deducted when reporting net sales.
From there:
- Revenue minus the cost of goods sold (COGS) = Gross profit
- Gross profit minus operating expenses = Operating income
- Operating income minus interest payments, taxes, and depreciation = Net profit
So while revenue shows the money generated, net income shows how much profit is left after expenses.
What is cash flow?
Cash flow is all about the actual cash and cash equivalents moving in and out of your business. Itโs a measure of money flows rather than accounting entries.
Your cash flow statement (one of the main financial statements alongside your P&L and balance sheet) shows:
- Cash inflows: Money coming in from sales, loans, or investments.
- Cash outflows: Money going out for wages, rent, supplies, debt payments, etc.
Unlike revenue, cash flow shows when money physically enters or leaves your bank account. Thatโs why cash flow is the most immediate measure of your businessโs liquidity โ its ability to meet financial obligations on time.
There are three main sections of a cash flow statement:
- Operating cash flow: Cash generated from normal business operations like sales and supplier payments.
- Investing cash flow: Cash spent or earned from investing activities like business acquisitions, equipment purchases, sold assets, etc.
- Financing activities: Cash inflows from loans or owner contributions, as well as cash outflows like dividend payments or interest payments.
All put together, they show your net cash flow for the period โ whether youโve got a positive cash flow (more money coming in) or negative cash flow (more going out).
Main differences between cash flow and revenue
The simplest way to think about cashflow vs gross revenue is this:
- Revenue measures income generated: it tells you how much your business has earned.
- Cash flow measures cash generated: it tells you how much real money you actually have available to spend.
The two differ because of things like accrued revenue, accounts receivable, and accounts payable. You might, for example, record a sale as revenue before the customer has paid for it (creating money owed to you). That boosts your P&L, but your cash balance hasnโt changed yet. Here are some examples
| Transaction | Recorded as revenue? | Recorded in cash flow? |
|---|---|---|
| You invoice a client for $5,000 on 1 June, with payment due in 30 days. | Yes (in Juneโs income statement). | No (not until cash is received in July). |
| You buy $2,000 worth of supplies on 15 June and pay immediately. | No (until matched as expense). | Yes (cash outflow in June). |
| You take out a $10,000 business loan. | No (not revenue). | Yes (cash inflow under financing activities). |
As you can see, cash flow and revenue tell two very different stories. Both are useful but for very different reasons.
Positive cash flow vs negative cash flow
Positive cash flow means more money is coming in than going out. In basic terms, positive cash flow means your business can pay its bills, invest in stock, save for growth and more. Itโs a sign of strong financial health.
Negative cash flow, on the other hand, happens when cash outflows outweigh your cash inflows. While it doesnโt necessarily mean disaster is afoot, it could be a sign itโs time to do some planning. At the same time, it could simply be that youโve made a large investment in future capacity (e.g. buying equipment or paying for business acquisitions).
Ultimately, persistent poor cash flow is a red flag that your business operations arenโt generating enough to cover your operating costs and debt repayments.
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Why both revenue and cash flow matter
You need both revenue and cash flow to wrap your head around your financial health.
- Revenue shows whether your companyโs primary operations are growing, which is essential for long-term business growth.
- Cash flow shows whether you have enough liquidity to pay bills and survive short-term pressures.
Think of it this way: a business might report rising net sales and gross profit, yet face cash flow issues if customers are slow to pay. Conversely, a company could have good cash flow one month (due to loans or one-off receipts) but still be unprofitable. Thatโs why successful small business owners review:
- The profit and loss statement to see net income and operating profits.
- The cash flow statement to understand actual cash movement.
- The balance sheet to monitor assets, liabilities and cash balances.
Together, these financial statements provide a complete view of your businessโs cash position and profitability.
How to strengthen both cash flow and revenue
Here are some ways you can improve your cash flow and revenue.
- Tighten up your accounts receivable: Send invoices straight away and give them options for online payment to avoid delays in money owed.
- Review pricing and costs: Check that revenue minus COGS still leaves healthy margins. Even high sales canโt offset runaway expenses.
- Stay on top of your operating cash flow: Review your cash flow statement to spot slow months or upcoming gaps.
- Control spending: Look at your operating expenses and defer any non-essential purchases if net cash flow turns negative.
- Plan ahead: Forecast your cash flow and net revenue to anticipate any seasonal changes or upcoming tax bills.
Bottom line? Revenue measures your success on paper. Cash flow proves whether that success can survive real-world challenges. Track both consistently for the best results โ because the healthiest businesses generate cash rather than just revenue.
