What’s the Difference Between Cash Flow and Revenue?
Cash flow is the cash generated by the company’s operating, investing, and financing activities. Operating cash flow is generated by the positive and negative changes in the current asset and current liability accounts. Investing cash flow is generated by the changes in the firm’s investment account. Financing cash flow is generated by the long-term liability and equity accounts. Net cash flow is the bottom-line figure on the cash flow statement and is the result of the addition and subtraction of the accounts from the top-line figure of net income, taken directly from the income statement.
What It Measures
Revenue is stated on the income statement based on the accrual accounting method. It is the dollar amount of sales made, but not necessarily paid, during the accounting period. Cash flow includes net income, but it also includes the changes in operating, investment, and financing accounts on a cash basis during the accounting period. The bottom line of the cash flow statement is the net increase or decrease in cash during that time period.
What It Means
Revenue must always remain greater than expenses. If it is not, the firm will post a net loss instead of a net profit or net income. If cash flow does not remain positive, the firm will not have money to operate. In both cases, a negative number signals a failing trend for the firm.
Accrual or Cash Accounting
For most businesses, except very small ones, revenue is usually reported based on the accrual accounting method. In other words, revenue is reported when sales are made but not necessarily paid. Cash flow, however, is calculated on a cash basis, or when the money actually changes hands.
Which Is Most Important for Your Business?
Revenue and cash flow are both crucial financial metrics for your business that are equally important. You must track your sales, which translates into dollars of revenue for income tax purposes and to develop the income statement. Without the income statement, you can’t prepare the cash flow statement. It is also important to understand that revenue and cash flow do not move up or down in lockstep with each other. If your business borrows money, for example, that might make it flush with cash flow, but the borrowing would impact revenue very little. Conversely, if a business has a lot of debt, it will spend a great deal of cash servicing that debt. Its cash position may be poor. Free Cash Flow = Operating Cash Flow - Capital Expenditures Operating cash flow comes from the cash flow statement and capital expenditures come from the balance sheet. Marginal Revenue = Change in Revenue / Change in Quantity
