Cash Flow vs Revenue: Know The Difference!

Cash flow and revenue are both financial metrics that tell you different things about a business. If you're to succeed in your entrepreneurship journey (or even in your personal finances), you must understand these two terms.

Figuring out finance stuff, however, can sometimes feel like solving a 1000 piece puzzle. There are so many different ideas and concepts to keep track of. Where do you even start?

Not to worry. This post will cover everything there is to know about cash flow vs revenue. You'll gain an understanding of each one, why they are important, and how they differ from the other. By the end of the post, you'll have enough knowledge on cash flow and revenue to savvily talk to any businessperson. Let's dive right in!

What Is Revenue?

Otherwise known as the “top line,” revenue is the total money generated by a business. Some companies will call it “sales” on their income statement, so make sure to watch out for that as well.

The reason revenue is called the “top line” is because it appears first on the income statement. From there, operating expenses are subtracted down, and at the bottom of the income statement, you'll find the “net income.” Because it's at the bottom of the income statement, net income is often referred to as “bottom line.” The way that a business can increase its bottom line is by either increasing its top line (revenue) or cutting down on its expenses.

For most businesses, their revenues are generated from the sales of products and/or services. Hence why it is sometimes referred to as “gross sales” or just “sales.” Of course, there are other ways a business can generate revenue, such as patents, royalties, and rental income.

Usually, revenue is measured annually, but it isn't uncommon to see monthly revenue as well.

Examples of Revenue

Let's say you run a computer business. Your revenue might come from a few different places, such as:

  • Selling electronics and computer parts
  • Fixing computers that are brought in for a check
  • Selling warranties on computers

If you are a charity, your revenue might be derived from the following sources:

  • Getting donations from individuals, corporations, and foundations
  • Receiving grants from the government
  • Collecting membership fees

If you own a real estate rental property, you might get revenue from:

  • Collecting rent payments (probably the majority of your revenue)
  • Charging parking fees to your tenants
  • Collecting laundry machine coins

Importance of Revenue

Revenue is crucial to the success of any business because it's what keeps a company alive. No matter how fancy your operations are, at the end of the day, if your business isn't making money… it's not going to be successful.

If you want to increase the amount of money that comes home to you as a business owner, the first place to look is revenue. Usually, an increase to the top line translates to an increase to the bottom line — emphasis on “usually,” though, as there are exceptions.

Revenue is also important because it gives you a good metric to track throughout the years. You can see how your business is doing by seeing if the revenue is rising or declining.

Lastly, you'll need to know your revenue numbers for tax purposes. The government will tax you on all “taxable profits.” You basically get this number by subtracting expenses from revenue.

How To Calculate Revenue

The formula for the total revenue of your business is:

  • Total Revenue = Operating Revenue + Non-operating Revenue

Basically, just add up all the money you've made from core business operations and other business activities. To dive in deeper, how to get operating revenue is:

  • Operating Revenue = Price x Quantity Sold

So, needless to say, there are really only two ways to increase your top line through operating revenue. Either increase the price of stuff or sell more of it (or both!).

And there isn't really a formula for non-operating revenue. You just add up all the money you've made from operations that aren't core to your business.

What Is Cash Flow

Unlike revenue, cash flow won't appear on the income statement. Rather you'll find it on the statement of cash flows or cash flow statement.

A cash flow statement basically summarizes the amount of cash and cash equivalents entering and exiting the company. The CFS allows investors and management to understand how a company's operations are going, where money is flowing in, and where money is flowing out.

The term “cash flow” refers to the actual dollar amount of cash entering or exiting a business in any given time period. If the amount of cash entering the business exceeds the amount leaving, then you have “positive cash flow.” If the opposite is true, the business has “negative cash flow.” Typically cash flow is most influenced by the accounts receivable and accounts payable in a company. Also, it usually comes in 3 different parts:

  • Cash flow from operating activities
  • Cash flow from financing activities
  • and Cash flow from investing activities

Importance of Cash Flow

Cash flow is a great indicator of the strength, profitability, and future outlook of a company. More than anything, it is a fantastic way to measure how liquid a business is (or the liquidity of a business). On top of that, a company can use cash flow statements to predict what future cash flow will look like. This is crucial for budgeting purposes.

For a lot of investors, cash flow is an indicator of company health. Unless a company is undergoing an expansion or drastic change, a negative cash flow typically serves as a red flag. Creditors and debtors can also use the cash flow statement to determine how much cash is available for the company to pay its obligations and how much is available for financing activities.

Overall, cash flow is a great measure of a company's financial wellbeing.

How To Calculate Cash Flow

There are a few different cash flows you can calculate. Operating cash flow gives you a good idea of how much cash you can reinvest into your business. A cash flow forecast calculates predicted future cash flows. And free cash flow gives a picture of your business' total cash at any given time.

For formula purposes, it's best to use free cash flow (or FCF) as it gives the most comprehensive picture of company finances.

The formula for free cash flow is:

  • Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure

In other words, you're taking your bottom line, adding back any depreciation or amortization (because those only take away money on paper), subtracting your working capital (because you need the money for your next period's operations), and subtracting capital expenditures (any random purchases made).

Difference Between Revenue and Cash Flow

When it comes to cash flow vs revenue, they both tell different stories about the business. It's important to understand that cash flow and revenue are RELATED, but they are not one and the same.

To provide an example, let's assume Company X has a revenue of $100 million.

  • Company X sells merchandise and has a gross sales of $100 million
  • The net income after all the expenses are subtracted comes out to $30 million

We then take a look at Company X's cash flow statement, and it shows the following:

  • The net income figure of $30 million is added to the previous cash position to create the new starting cash position
  • The Free Cash Flow is arrived at by netting the cash inflows and outflows to arrive at $50 million

What this tells us about Company X is that it made over $100 million in this given time period, netted $30 million in profit, and has $50 million in cash at the end of the period to spend. Your net cash / net cash flow is the change in your free cash flow from period to period. Clearly, the $100 million figure and the $50 million mean two very different things.

Your Own Cash Flow and Revenue

When it comes to cash flow vs revenue, it's not just important for businesspeople to understand but common folk interested in personal finances as well. It might be helpful for you to figure out your own personal revenue and cash flow. This can help with budgeting, setting expectations, and reaching goals.

Cash flow for yourself is typically very easy to find out. It is basically how much you have in your bank accounts and how much that changes during the accounting period.

Revenue, on the other hand, might require a bit more work. To find out your own personal revenue, you'll need to sum up all the areas of your life where you're making money. This includes all your income from your 9-5 job, your Etsy side hustle, and the money you make from your investments.

When it comes to an understanding of your own finances, these two numbers can clarify not only how rich you are but also how liquid you are.

Cash Flow vs Revenue

Cash flow and revenue are two very different metrics that both measure how well a business is doing financially. They are also found on two different financial statements.

Revenue measures the total amount of money that a business pulls in before subtracting any expenses. This is otherwise known as the “top line.”

Cash flow, on the other hand, measures how much free cash a business has to spend on investing activities or accounts payables. This is known to be a good indicator of a company's overall financial health.

Understanding and working with both cash flow and revenue will give you a better understanding of a business. This understanding could ultimately help you come up with new ideas and build more success for your company.

Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.