Cash flow and revenue are two financial measures that assess the financial condition of a small business. Revenue measures the effectiveness of the company in selling its products and collecting its funds, but this is merely an accounting process that occurs when invoices are issued to customers for products or services sold. Cash flow is a measure of the company’s liquidity, or the inflow and outflow of cash from the business. Cash flow from operations measures the company’s ability to collect what it charges its customers.
What is the difference between cash flow and revenue?
Revenue is the cash amount generated by the company through marketing or other activities. Cash flow is the cash generated from the company’s operating, investing, and financing activities. Revenue must always be greater than expenses to maintain the health of the company. Cash flow should always remain positive; otherwise, the company will not have the necessary funds to operate.
Financial Statement
One of the differences between the concepts of revenue and cash flow is the financial statement in which they are reported. Revenue is reported as the top-line number on the income statement. Because it represents the total sales made during the accounting period, all expenses are deducted from it to arrive at the company’s net income, which is the bottom line on the income statement.
Cash flow is the cash generated from the company’s operating, investing, and financing activities. Cash flow is generated through the positive and negative changes in current asset and current liability accounts. Cash flow is generated from changes in the company’s investment account. Cash flow is generated by accounts of long-term liability and equity accounts.
Net cash flow is the final figure in the cash flow statement and is the result of adding and subtracting accounts from the top number of net income, taken directly from the income statement.
What does it measure?
Revenue is presented on the income statement based on the accrual accounting method. It is the cash amount of sales that have taken place, but not necessarily paid, during the accounting period. Cash flow includes net income, but it also includes changes in operating, investing, and financing accounts on a cash basis during the accounting period. The ending balance in the cash flow statement represents a net increase or net decrease in cash during that time period.
What does this mean?
Revenue must always be greater than expenses. If not, the company will post a net loss instead of net profit or income. If cash flow does not remain positive, the company will not have enough cash to operate. In either case, a negative number indicates a negative trend for the company.
Accrual or Cash Accounting
For most businesses, except for very small ones, revenue is reported on an accrual basis. In other words, revenue is reported when sales occur but not necessarily paid. However, cash flow is calculated on a cash basis, or when money is actually exchanged.
Which is more important for your business?
Both revenue and cash flow are critical financial metrics for your business and are equally important. You need to track your sales, which translate to revenue dollars for income tax purposes and for preparing the income statement. Without the income statement, you cannot prepare the cash flow statement.
Note: Cash flow is a measure of your liquidity. You cannot run your business without enough cash to support it.
It is also important to understand that revenue and cash flow do not move in sync with each other. If your company borrows money, for example, it may make it cash flow-rich, but borrowing will not significantly affect revenue. Conversely, if the company has a lot of debt, it will spend a lot of cash to service that debt. Its cash position may be weak.
Questions
The Circulating
How to calculate free cash flow? The simple formula is: Free Cash Flow = Operating Cash Flow – Capital Expenditure. Operating cash flow is obtained from the cash flow statement and capital expenditure is obtained from the financial statement.
How to calculate marginal revenue versus total revenue? Marginal revenue is the change in total revenue from selling one additional unit of a product or service. To calculate marginal revenue, you need data from two time periods. It is calculated as follows: Marginal Revenue = Change in Revenue / Change in Quantity.
What type of account is considered unearned revenue? Unearned revenue is revenue related to an advance payment for goods or services that have not yet been delivered. Unearned revenue is not presented in the income statement until it is delivered but not necessarily paid.
What is the revenue cycle? The revenue cycle is the time it takes to sell a product or service until payment is received.
Source: https://www.thebalancemoney.com/cash-flow-vs-revenue-what-s-the-difference-5206446
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