What’s the Difference Between Cash Flow and Revenue?
Owning an emerging business is inspiring, exciting, and a little overwhelming. Many business owners have some elements of their new business down pat, usually in line with whatever personal strengths enticed them into business in the first place.
Some have great people skills, amazing marketing strategies thanks to social media engagement, or amazing products and a hungry-to-buy market. All that is great and a perfect sign that you are ready to launch a successful business but what many business leaders lack is the ability to stay on top of their finances.
Why? Because finances are sort of wrapped up in general life experiences. By this stage you know about banking, accounts, loans, and how to spend money….it can’t be harder than that, right?
Yes, yes it can.
When it comes to business, balancing your finances needs to be professional, not whatever patchwork of skills you put together saving your pocket and birthday money as you learned about money growing up. Business is next level and you need to have your head in the game if you want your business to succeed in the long run.
You need to be familiar with everything from business cash flow to business revenue, taxes, and more. There are many financial aspects involved when it comes to running a business, and it is important to ensure you are familiar with all of the key ones.
Don’t get me wrong, you can manage just fine on flimsy record-keeping and financial knowledge as a start-up. You can even make some juicy profits, but where things will fall apart is when it comes time to scale.
Once you get yourself out of that emerging status and start making real money, everything changes and a flimsy financial system will come crashing down around your ears. If that sounds like a time to panic, you are absolutely right. You stand to lose everything in the chaos, including your hard-won customers who aren’t going to stick around long in a crisis.
Now I’m not pointing fingers here, just about every emerging business is guilty of underrating financial structure and I can’t really blame anyone for that line of thinking, there’s an unwritten understanding that in business all you need is to make sales: the money rolls in and takes care of itself. This is false.
I know that trying to keep on top of every cent that comes in and goes is a tedious process. It can be overwhelming to keep track of it all, especially when it takes you away from the aspects of business you are really passionate about.
Trust me, no matter how gruelling it might seem, save yourself the pain and get some solid financial structure behind you now while you are still small enough and flexible enough to adjust. You won’t have time to focus on understanding your finances once the pressure of making more sales, servicing customers, and managing staff hits.
Business means making money, neglecting finances spells disaster. Having a detailed knowledge of all aspects of your finances will help you manage them a lot better.
That’s easy for me to say now. After climbing the ranks in my first business I quickly realised how little I knew about finances and how costly that can be in any business, so I took myself back to study. So when I talk about business finances, I have some backing there with Applied Business studies and economics which really helps me get my head around things. If you are starting out I get that the topic of finance is so broad and confusing, you probably don’t even know where to begin. So here’s my advice: the best place to start is knowing cash flow, revenue, and how these two terms are different from each other.
The rest will follow later.
Cash flow: The net amount of cash and cash equivalents transferred into and out of a business.
One way to put it is that cash flow is the lifeblood of your business. To keep your business alive, you need to keep that ‘blood’ circulating by both generating and consuming cash – the money you have moving out is just as important as money in. How you reinvest your money in your business and develop your infrastructure and staffing is all part of the business game.
When you know what your numbers are and how to control them, you set yourself up with the perfect balance of income and expenses that allow your business to grow rapidly, even in times of crisis or unexpected change.
Aim for a positive cash flow. Having a positive cash flow means that your business has increasing liquid assets. This also means that you are able to easily settle debts, reinvest in the company, pay out money to shareholders as well as provide a buffer for any financial struggles your business may face in the future.
How to keep track of cash flow?
You can use a cash flow statement (CFS) to assess your company’s flexibility, liquidity (the ability to turn assets or investments into cash) and overall performance by reporting different cash flows. There are three main types you’ll need to cover to get an accurate snapshot:
- Operating cash flow. Known as your Cash Flow from Operating Activities (CFO), this shows the amount of money your company generates from its main business offering. It won’t include long-term capital expenditures or investment revenue and expenses – that’s the next one.
- Investing cash flow. Cash flow from investing activities depicts the amount of money your company generates from investment activities such as purchases of physical assets, securities, investments or the sale of assets and securities. Negative cash flow from investing activities is not necessarily a bad sign if it is for the long-term health of the business.
- Financing cash flow. Cash flow from financing activities (CFF) shows the net flow of cash used to fund your company. Transactions that involve debt, equity, and dividends are among these financing activities. The CFF shows the business’ financial and capital structure strength.
The free cash flow, determined by subtracting all capital expenditures from the CFO, shows the true profitability of your business. It’s the money your company has left to use for business expansion or for shareholder returns after taking into account cash outflows.
Revenue (aka sales) is the income your business receives from normal operations and other business activities. The gross income figure determines your net income once costs are subtracted.
For emerging businesses, it is important to have a positive revenue early on.
There are two types of revenue to look after: operating income and non-operating income.
- Operating income is the revenue from the company’s core business or normal operations like the sales of goods or services.
- Non-operating income is the revenue that comes from secondary sources such as proceeds from selling an asset or money awarded through litigation. These are infrequent and nonrecurring, so they are often unpredictable and are referred to as one-time events or gains.
Different types of businesses will rely on very different revenue streams. Commercial businesses will receive revenue from sales. For government agencies, revenue is the money from taxation, fees, fines, inter-governmental grants, any sales made, etc. For non-profits, revenue comes from donations, government grants, investments, fundraising activities, etc.
Understanding your revenue and what is involved helps you analyse your profits and control your profit margins.
Profit is what is left over once you have your income (possibly from multiple streams) and account for all your expenses including debts and operating costs.
You might also hear profit referred to as net income, just be careful not to confuse net income and net profit.
There are three types of profit you can calculate:
- Gross profit. This is your revenue minus the cost you pay to have your products made or your services delivered – so things like raw material costs, labour costs, shipping and manufacturing.
- Operating profit. This is the gross profit (#1) minus all other fixed and variable expenses relating to the business which is your overheads including rent, utilities, payroll etc.
- Net profit is the income you have left over after all expenses have been paid, including taxes and interest.
As you work through your cash flow statement each section will work into the next leaving you with your net profit at the end, which neatly balances the activities in the previous sections.
The difference between cash flow and revenue
Both cash flow and revenue are essential to help you evaluate the financial health of your small business. Even though computing for net profit through cash flow and revenue will result in the same amount, it’s important to keep these figures separate in your mind and calculate each individually as they can influence how you spend and invest money in different ways.
Cash flow is a liquidity indicator. It breaks down your company costs and expenses into operating, investing, and financing activities which helps determine your overall fitness within your industry. A positive cash flow indicates that your company is able to effectively manage debts or cover unexpected costs, reinvest for growth as well as return money to your shareholders.
Cashflow is a good overview of where your company’s money comes in and goes out.
Revenue only captures what your business gains from the sales of your products and/or services and other one-time events. It measures the effectiveness of your business sales and marketing. Knowing this can help you find new ways to increase sales or decrease costs or volume, especially helpful when it comes time to scale or when you are facing an increase, or even decrease, in demand for a product or service. High revenue means that your company is getting great sales numbers, but that doesn’t necessarily mean your company is flourishing. You need to make sure your revenue always exceeds your other costs.
If you’ve started your business on wonky financial standings and are finding things are falling apart as you grow, it’s still salvageable. You’ll need to learn fast and be ready to be flexible but you can quickly gain ground and turn bad financial habits into positive cash flow with a few tweaks.
Here are tips you can lean on to get started:
Ask for what you are owed
This is an easy bad habit for business owners to fall into. Business is business, it’s not personal. Trying to be friends with your clients isn’t going to pay the bills. Make sure you ask full price and ask for what is owed, even going as far as to chase up outstanding payments. Your business needs you to recover your dues.
Get into the habit of sending your invoices early. You can set automatic emails to chase up reminders for unpaid invoices.
Mix upfront payments with instalments and retainer arrangements
Signing your customers up for a monthly retainer agreement clears up the expectations on both ends around deliverables. It also safeguards you against being asked to do additional work beyond what is offered in your package prices. It allows for easy invoicing and a set income that is reliable and predictable.
Know where your money needs to go
Spending money is important, but only if you do it the right way on the right resources. Look at your expenses to find patterns of spending you aren’t using or are not worth the return in sales.
Raise prices intelligently
Setting the right price for your products or services is hard to do. It sounds easy and should be a basic part of business operations but it’s a factor that trips a lot of self-starters up and it can carry through for years, even the life of the business.
Many startups are afraid of pricing themselves too high and putting customers off, the danger is that you wind up selling your products and services for too low, even when you’re consistently providing your customers with great results. Underselling yourself cuts into your profits but also restricts how far your business is able to go. Underselling also makes it hard to correct your prices because too much of a price jump will be a shock to customers.
Some startups go the other way and inflate their prices on ego, pushing to sell at prices that have been established by business gurus who have earned trust and established themselves for years in the industry. Research the best place to start your prices and increase gradually to account for inflation and rising supplier costs.
Small adjustments to your financial habits and mindset are all you need to start managing your finances professionally so you can control and steer your business to success.