Revenue vs Cash Flow - What's the Difference?

Last Updated: April 26, 2022 9 min read
Author: Zach L.

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To run a successful business both revenue and cash flow are important. Both revenue and positive cash flow are measures of how successful a company is, but they are different.

Revenue vs Cash Flow - What's the Difference?

It's important for every business to carefully monitor both of these metrics.

Failing to do so can result in a company going out of business. In this article, we will be looking at what revenue and cash flow are, how they work, and the key differences between the two metrics. So if you are interested in learning more about revenue and cash flow, keep reading!

What is Revenue?

Revenue, in a business context, is defined as the total amount of money that a company brings in from sales of its products and services. It's calculated by adding up all the sales revenue for a given time. Revenue can be generated from both sales of goods and services.

Measuring revenue is important for a company because it shows how much money the company is making from its operations. This can be used to measure the success of a company and to help make business decisions. Increasing revenue is the topmost priority for most businesses. This can be found on the income statement.

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What is Cash Flow?

Cash flow, on the other hand, is defined as the movement of cash in and out of a company. It measures how much cash is available to a company at any given time. This includes cash that is generated from operations, as well as cash that comes in from investments or loans.

Cash flow is important for a company because it shows how much cash the company has available to pay its bills and fund its operations. It's also used to measure a company's financial health. A healthy cash flow means that a company has enough cash to cover its expenses.

How do Revenue and Cash Flow Work?

Now that we know what revenue and cash flow are, let's take a look at how they work.

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Revenue

Revenue is generated when a company sells its products or services and this money comes into the company as cash and is recorded as revenue in the accounting records. The company can then use this money to pay its bills and fund its operations. This is commonly referred to as the sale of goods. To calculate revenue, you have to multiply units sold by the average unit price. For example, if a company sells 100 widgets at $10 each, then its revenue is $1000.

Cash Flow

In simple words, cash flow is all about cash coming in and out of a company. Cash flow from operations is the most important type of cash flow, as it measures how much cash a company has generated from its normal business activities. This includes money from sales of goods and services, as well as money from things like investments or loans. This is also known as cash inflows.

Cash flow can also be used for expenses! For example, if a company has a negative cash flow from operations or a higher cost of goods, it means the company is losing money and needs more funds and strict money management. This is also known as cash outflows.

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Importance of Revenue

Now that we know what revenue is and how it works, let's find out the importance of revenue for a business. There are several reasons why increasing revenue is so important for a company, here are some key reasons:

  1. Business growth - Revenue is used to measure a company's business growth. It shows how much the company has grown from one period of time to another. This can help set goals and plan future business growth.
  2. Helps make decisions - Revenue can help make business decisions. For example, if a company's revenue is increasing, it might decide to expand its operations. If a company's revenue is decreasing, it might decide to downsize its operations.
  3. Financial stability - Revenue is an important factor in measuring a company's financial stability. A healthy revenue means that the company has enough money to cover its cash outlays and is doing well financially.
  4. Easier to get loans and credits - A company's revenue can be used to get loans and credits from banks and other financial institutions. This is because lenders are more likely to give loans to companies that are making money.
  5. Predict future income - Revenue can be used to predict a company's future income. This can help make financial decisions, such as budgeting and forecasting. Moreover, it helps in taking important future decisions related to selling or buying a company.

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Importance of Cash Flow

Just like revenue, cash flow is also very important for a company, Here are some key reasons why:

  1. Measures financial health - Cash flow is a key measure of a company's financial health. A healthy cash flow means that the company has enough money to cover its expenses and is doing well financially.
  2. Helps make informed decisions - Cash flow can help in making decisions about the company's future. This is because cash flow reflects the amount of cash available to the company to pay for its expenses. It could be anything from payrolls, to buying raw materials, to marketing campaigns.
  3. Helps in meeting short-term and long-term goals - A company's cash flow can help it meet both short-term and long-term goals. Short-term goals might be things like paying off debt or meeting payrolls. Long-term goals might be things like expanding the business or investing in research and development.
  4. Keep track of spending - If you don't keep track of your spending, you might end up in debt. The same goes for small businesses. By keeping track of cash flow, companies can make sure they're not overspending and are keeping within their budget, and are keeping their financial obligations in check.
  5. Shows how well a company is doing - Just like revenue, cash flow also reflects how well a company is doing financially. A healthy cash flow means the company has a large profit margin and is doing well. On the other hand, a negative cash flow means the company is losing money.

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So, What's the Key Difference Between Revenue and Cash Flow?

There are a few differences between revenue and cash flow, let's find them out!

  1. What do they measure - Revenue measures a company's income, while cash flow measures the company's actual cash flow. This means that revenue can be more or less than the company's actual cash flow.
  2. When they happen - Revenue happens when a product is sold, while cash flow happens when the money from the product sale is received by the company. Cash flow is an ongoing process while revenue is a one-time event.
  3. How they're calculated - Revenue is calculated by multiplying the number of products sold by the price of each product. Cash flow is calculated by Operating Cash Flow minus Capital Expenditures.
  4. What's included - Revenue includes all money generated by a company, while cash flow only includes money that's available to the company. This means that revenue can be impacted by things like loans and credit.
  5. What they're used for - Revenue is mainly used for measuring a company's net profit and performance for certain events. On the other hand, cash flow is used for measuring a company's financial health on an ongoing basis as well as for making important future decisions.
  6. How they're reported - Revenue is usually reported in the company's financial statements. Revenue can be registered even if the cash is not paid and only the sale is registered. Cash flow, on the other hand, can't be reported without the cash being in hand. Once the cash is in hands, it's immediately reflected in the cash flow statement.

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Which One is Easier to Measure?

Measuring and calculating revenue is pretty straightforward. And since it is a one-time thing for a given period you don't need to worry about calculating it over and over again. But, measuring and calculating cash flow is a bit difficult because it is an ongoing process. You might have to do it weekly or monthly to get a good understanding of it. However, it is an important measurement of the health of your company so you should plan on measuring it long term and not for a short time period.

You have to take good care of your balance sheet, bank account, working capital, statement of cash flows, business expenses, accounting, and other financial reports to understand your company's cash flow. Measuring cash flow needs a lot of patience and hard work. The best way to do this is by hiring a professional who knows how to read and understand financing activities, interest payments, cash payments, operating expenses, cash balance, etc.

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Which one is More Important?

The simple answer is both! Revenue is important because it shows how much money the company has earned. Cash flow is important because it shows how much money the company has to run the business successfully.

If you don't have a healthy cash flow, you won't be able to make money, and if you don't have good revenue, you might not be able to stay in business! So any business needs to have a healthy balance of both.

The Bottom Line

Now that you know the difference between revenue and cash flow, you can make more informed decisions about your business! Keep in mind that having a healthy cash flow is just as important as having a healthy revenue. Both of them play a major role in a business's success and survival. So make the necessary changes to improve your company's cash flow and revenue and watch your business thrive in the long run!