When it seems like youโre bringing in more money but your bank account still feels tight, youโve encountered the difference between gross revenue and cash flow. Itโs a cause of a lot of frustration among business owners.
In basic terms, gross revenue is about money earned โ what your business billed or generated from sales โ whereas cash flow is about actual cash โ what youโve received and what youโve paid out. Both are useful financial metrics for financial management, but they answer different questions about your companyโs financial health.
What gross revenue does and doesnโt mean
Revenue is the income your business makes from selling products or services. Gross revenue is the total value of sales before taking off costs โ itโs not the same as net profit or even gross profit.
Unclear on a few of the most common terms you see on your financial statements? Hereโs a quick recap:
- Gross revenue: Total sales, shown excluding GST for Australian businesses that are GST-registered, because any GST collected isnโt income generated โ itโs money you hold for the ATO.
- Net revenue: Sales after things like returns, discounts, allowances, etc. Many people use โnet salesโ and โnet revenueโ interchangeably, depending on the business.
- Gross profit: Revenue minus cost of goods sold.
- Operating profit: Revenue minus all operating costs.
- Net income: You get this figure after interest and tax.
So gross revenue is a top-line measure of the money generated, which can include sales revenue from your main trading plus other income streams like rental income or interest income โ depending on how your accounts are set up.
Why does cash flow feel more โrealโ?
Cash flow tracks how money moves in and out of your business over time โ your cash inflows and cash outflows. In other words, this is what determines your cash balances and whether you can pay bills on time.
Your cash flow statement is the report that pulls all of this together. A good cash flow statement shows where cash came from and where it went, and is usually split into:
- Operating cash flow (i.e. cash from normal business operations)
- Investing cash flow (i.e. cash linked to investing activities like buying equipment or business acquisitions)
- Financing cash flow (i.e. cash from financing activities like loans, debt payments, interest payments, dividend payments, etc.)
When people talk about net cash flow, they usually mean the overall change in cash during a period of time โ whether you ended up cash positive or short. And yes, cash equivalents are usually treated as part of cash for cash flow reporting because they can be converted quickly.
Where these numbers might show up
Gross revenue appears on your profit and loss statement, which is about company performance over a set period โ what you earned and what you spent. Itโs usually prepared using accrual accounting (i.e. recording revenue when itโs earned, not necessarily when itโs paid). Cash flow appears on the cash flow statement and itโs all about actual cash movement โ the money that hit or left your bank account.
Hereโs the big takeaway: cash flow and revenue are connected, but theyโre not the same. The difference between cash flow and revenue more often than not comes down to timing.
How can gross revenue be high while cash flow is poor?
There are a number of instances that cause the issue of high revenue but poor cash flow.
1. Credit terms and accounts receivable
If you invoice a customer today, that sale can count toward revenue now, but cash might not arrive for another 14, 30, or 60 days. Until itโs paid, it sits in accounts receivable.
A fast-growing business can have rising gross revenue and still struggle with future financial challenges if too much cash is tied up in receivables.
2. Operating expenses donโt wait
Revenue might be booked, but operating expenses like wages, rent, subscriptions, and insurance demand cash right now. If cash inflows lag behind your cash outflows, you can end up with negative cash flow even while your P&L looks nice and healthy.
3. Big purchases and business growth
Growth usually means investing in stock, equipment, software, vehicles, fit-outs, or something else useful, all of which are real cash outflows. Even if your net sales are climbing, large investing activities can drag your net cash flow down.
4. Debt, interest, and dividends
Your P&L might show profit, but your cash can still be squeezed by things like:
- Debt payments: Principal repayments donโt minimise profit, but do they reduce cash.
- Interest payments: Cash leaving the business.
- Paying dividends: Also cash leaving the business.
Example: Strong gross revenue, negative cash flow
Letโs say a small service business invoices for $120,000 this month. Thatโs strong gross revenue and healthy money earned. However:
- $35,000 of that is unpaid invoices.
- $60,000 went out in wages and other business expenses.
- $10,000 was spent on new equipment.
- $6,000 went to loan and interest payments.
On paper, the income statement shows a solid result โ maybe even a strong net profit. But cash-wise, you could be down for the month. Thatโs negative cash flow caused by both timing and established cash commitments.
Tracking gross revenue and cash flow for your business
Positive cash flow means you brought in more cash than you paid out in a period โ your business ended up cash positive. Itโs a great sign for resilience and your ability to meet financial obligations. But itโs also possible to have positive cash flow for reasons that wonโt last, like stretching out supplier payments or drawing down a loan. This is why itโs useful to look at the split between operating cash flow, investing cash flow and financing cash flow โ not just the final number.
