Cash Flow vs. Revenue: What Are the Main Differences?
By Indeed Editorial Team
Updated October 11, 2022
Published May 9, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Understanding financial terms is helpful for anyone interested in operating a business. Cash flow and revenue are two figures that business owners and their executive team make sure they are aware of. By understanding these terms, you can use revenue and cash flow to assess the company's finances. In this article, we explain cash flow vs. revenue, determine the role they both play in determining the financial state of a company, and provide some examples.
Cash flow vs. revenue
Before looking at the differences between cash flow vs. revenue, it's necessary to clarify what each term refers to and how to determine those figures. Revenue is the money a business earns by selling its services and products, and cash flow is the net total of money transferred out and into the company. While revenue indicates the value of a company's marketing and sales, cash flow indicates the cash available to the business. It's important to note that, in contrast to revenue, cash flow can be a negative figure.
Revenue consists of the net income generated by selling goods and services based on the company's primary operations. You may hear people refer to revenue as the top line, and that's because you find it as the first line in an income statement. Revenue is the gross income generated prior to deducting expenses. While some people may use revenue and sales interchangeably, they aren't the same. Revenue incorporates all kinds of income, including funds generated from income earned from the interest on bonds or investments in a bank. Sales indicate the money made by selling goods and services.
Based on the method of accounting and the industry, companies can report revenue differently. Retail stores prefer to report the total number of sales after merchandise returns. For that reason, retailers typically don't report revenue, choosing to report net sales. Businesses can separate and list revenue as individual line items on a profit-and-loss statement based on the kind of revenue. For instance, many enterprises list operating income individually, with one line for funds generated from the business's central business operations. The following are some common terms when working with revenue numbers:
When you accrue revenue, you're listing revenue generated by the business for providing a good or service that the customer hasn't paid for yet. When you use accrual accounting, you report revenue when the sales transaction occurs, but it might not reflect cash received. This type of revenue affects cash flow numbers eventually, but it doesn't immediately affect them.
To understand unearned revenue, you can consider it the contrast of accrued revenue. Unearned revenue is money that a customer has prepaid for goods and services that they haven't received yet. You can record the income as deferred when a company gets prepayments for goods or services. Still, the revenue may not be on the profit-and-loss statement until after the delivery of services or goods.
Some companies generate revenue from sources other than selling a service or product. The form of revenue depends on the nature of the organization or company. Investors in real estate, for example, may generate revenue from rental income. Municipal, provincial, and federal governments can generate revenue from income or property tax receipts.
Governments can also make money from interest generated from a bond or the sale of an asset. Non-profit organizations and charities typically generate funds from grants and donations. Colleges, universities, and private schools can generate income by fixing a price for tuition and charging students. They can also generate money from the gains made from investments in their endowment fund.
Comprehending cash flow
Cash flow is the cash equivalents and cash remaining after all inbound and outgoing transactions occur. When cash flow is positive, it indicates the company's cash on hand is increasing, allowing it to pay its debts, put money back into the business, pay its shareholders, and any other expenses.
Cash flow is different from revenue because you can't accrue it, and cash flow trails the real cash in hand and the funds circulating in and out of the company. The paramount significance of cash flow lies in a company's ability to stay in business. It's vital that businesses always have enough cash on hand to meet current financial responsibilities. Organizing these numbers can involve a cash flow statement:
Cash flow statement
A cash flow statement is where you find a company's cash flow. The report indicates sources of money and how the company spends it. The first line of a cash flow statement starts with the net income or profit for a specific duration. You can obtain the net income figure from the company's income statement. An income statement typically begins with revenue at the top, and after you itemize all expenses, you list net income at the bottom.
The reason people refer to revenue as the "top-line number" and net income or profit as the "bottom line figure" is due to their location on an income statement. The starting point for a business's cash flow analysis is net income. All the cash activities a business participates in deduct from or add to the business's net income. You can list the activities listed in a cash flow statement separated into three parts on a cash flow statement:
Cash flow derived from operating activities
You can report changes to current liabilities and current assets as operating activities. You list these interim items within the operations cash flow. Accounts receivable are one of the items you may find in this section of the cash flow statement. Accounts receivable is money that clients owe the business. When receiving payment, you record it here. Accounts payable are the company's financial obligations that they owe to suppliers. When you make a payment of the outstanding amount, you record it as an operating activity.
Cash flow derived from investing activities
You can record money paid or cash generated from long-haul assets in the investing activities section. For instance, you can record property purchases, a plant, or hardware, such as a new manufacturing facility in this part. Investing activities include the purchases of land, office equipment, and vehicles. Credits in this section can be because of selling assets like part of a company or the sale of a building. You can record long-term purchases or sales that impact the company's cash as activities derived from investing.
Cash flow derived from financing activities
Businesses usually fund their business in two different ways: equity financing or debt. When a company receives cash for issuing bonds, stocks, or getting a loan from a bank, you record the money received as cash flow activity from financing. Discharges of funds in this section can indicate dividend payments, a stock repurchase, or paying down on a bond or stock. To understand cash flow and revenue simply, consider that revenue is a singular inflow of funds into a business, and in contrast, cash flow indicates inputs and outputs of money.
An example of the difference between cash flow and revenue
Consider the following example to better understand how cash flow and revenue differ. Mollison Mowers manufactures and distributes lawn mowers through hardware stores and other retail locations. Here are three points that demonstrate the differences between cash flow and revenue:
Mollison Mowers sells a lawnmower for $300 to a retail store on June 1st and sends an invoice by email. The company posts $300 in revenue, but the retailer doesn't pay the invoice until June 30th since Mollison has net 30 terms for their invoices. Mollison mowers post the sale immediately, but they don't collect the $300 for 30 days.
Mollison Mowers pays $270 in expenses for the lawnmower they sold. Before the lawnmower sale, the company paid the costs for the lawnmower in April and May. The company has $270 in cash outflows in April and May before collecting $300 on June 30th.
The profit generated by the lawnmower sale is $30, and the company posts the profit on June 1st because the sales process is complete when the product is delivered. The company doesn't collect the cash until June 30th, which means that Mollison Mower's has to wait to collect their receivables. Other companies don't have this issue of collecting the funds later because they collect cash from the customer at the point of sale.
Many retailers receive payment at the point of sale via cash, debit, or credit card. Collecting payment at the point of purchase allows retailers to collect cash quickly, making cash management much more manageable. Mollison Mower's cash planning is more complicated, affecting their cash flow.
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