Cash Flow vs. Revenue: What's the Difference?

It's more than just the accounting method

Person working at the cash register at a bike shop
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Cash flow and revenue for a small business are two financial metrics that measure the financial condition of the operation. The main difference between the two is that revenue measures the effectiveness of the firm’s sales and marketing efforts, and cash flow is a measure of the firm’s liquidity or the flow of cash coming into and leaving the firm.

Key Takeaways

  • Revenue and cash flow are two key performance metrics for your business, tied together by the net-income performance metric.
  • Revenue is accrued, meaning it has been earned but is not yet posted to general ledger accounts, while cash flow is stated on a cash basis.
  • Cash flow is composed of net income plus the result of the operating, investing, and financing activities of the firm.
  • You can’t calculate cash flow without first developing the income statement.

What’s the Difference Between Cash Flow and Revenue?

  Revenue Cash Flow
Financial statement Income Statement Cash Flow Statement
What it measures The dollar amount of sales the firm generates through marketing or other activities The cash generated by operating, investing, and financing activities of the firm
What it means Revenue must always remain greater than expenses for a healthy firm. Cash flow must always remain positive or the firm does not have the money to operate.
Accrual or cash accounting Revenue is reported on an accrual basis. Sales have been made that are not yet paid for. Cash flow is reported on a cash basis. It is the cash that moves into and out of the firm.

Financial Statement

One difference in the concepts of revenue and cash flow is the financial statement on which they are reported. Revenue is reported as the top-line number of the income statement. Because it represents the total sales made during the accounting period, all expenses are subtracted from it to arrive at the company’s net income, which is the bottom-line figure on the income statement.

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.

Net income ties the concepts of revenue and cash flow together and shows their relationship. You can’t develop the cash flow statement until after you build 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.

Your cash flow is a measure of your liquidity. You can’t operate your business without adequate cash to support it.

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.

Frequently Asked Questions (FAQs)

How do you calculate free cash flow?

A simple formula is:

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.

How do you calculate marginal revenue vs. total revenue?

Marginal revenue is the change in total revenue from one additional product or service sold. To calculate marginal revenue, you have to have data from two time periods. It is calculated as:

Marginal Revenue = Change in Revenue / Change in Quantity

What type of account is unearned revenue?

Unearned revenue is revenue for prepayment of goods or services that have not yet been delivered. Unearned revenue is not shown on the income statement until it is delivered but not necessarily paid.

What is a revenue cycle?

A revenue cycle is the time from when a product or service is sold until payment for the product is made.