The great debate: cashflow vs revenue and their importance

Cashflow and revenue are crucial metrics that can help small or medium-sized businesses navigate the financial landscape. It’s easy to confuse one for the other, but understanding how they differ will benefit you over time.

Imagine this scenario: your business is raking in sales, and your revenue numbers are through the roof. Sounds great, right? But it’s time to pay your bills, and you find yourself scrambling for cash. How can a thriving organization on paper struggle to make ends meet in reality? The answer lies in understanding cashflow vs revenue.

Our expert guide provides more insights into these two concepts. It explains what each term means, their differences, and their impact on a company’s fiscal health. 

What is cashflow?

Cashflow is the amount of money that moves in and out of a business over a specific period. It encompasses both incoming funds from sales of products and services and outgoing payments for expenditures. 

The formula for calculating this metric is:

Cashflow = Cash inflows - Cash outflows

Cash inflows are the money that comes into your business from all sources, such as sales, investments, and other means. Cash outflows refer to expenses, such as salaries and bills. 

A positive cashflow means enough cash to cover expenses and invest in growth. On the other hand, a negative cashflow means your expenses are outpacing your income, which is a red flag for any business. 

Consider a retail store that sells handcrafted products. The store generates revenue from sales but also has regular expenses like inventory purchases, utility bills, and salaries. If the store sells $5,000 worth of products in a month (cash inflow) but spends $4,000 on expenses, the cashflow is positive ($1,000). This money can be reinvested to expand the product line or improve marketing initiatives.

However, if the same store faces unforeseen costs, like a sudden hike in rent or equipment repair bills, and these exceed the revenue, the cashflow turns negative.

Why is cashflow important?

A Zippia study showed that about 20% of SMBs fail within their first year due to liquidity problems. Just like oil to machinery, cashflow keeps operations running in your firm. Having a positive net can help you achieve the following:

Meet financial obligations

Imagine paying your rent, restocking supplies, and covering employee salaries without breaking a sweat. A steady cashflow ensures you can meet these obligations promptly while maintaining the trust and confidence of your team and suppliers. 

Invest in your company’s growth

With sufficient liquidity, you can seize opportunities to invest in your business’s future. You can invest in diverse small business marketing or fund research and development for innovative products. These investments often increase revenue, creating a positive growth cycle.

Avoid debt reliance

A 2023 survey by Goldman Sachs revealed that 60% of businesses find it difficult to access loans and credit facilities due to their high interest fees. However, with a robust cashflow, an SMB can reduce its reliance on loans or debt financing, keeping its credit in good standing. Debt-free growth is not just a financial advantage but also a stress reliever.

Weather financial storms

Every business faces unexpected challenges, whether it’s a sudden drop in sales, an economic downturn, or unforeseen expenses. A healthy cashflow acts as a financial buffer, allowing your business to navigate through turbulent times without anxiety. 

Want to learn more about debt financing? Read our expert guide on what debt financing is.

What is revenue?

Revenue or cash inflow is the total income your business operations generate, usually from the sales of goods or services, before any expenses are deducted. It’s often called the “top line” because it usually sits at the top of the income statement. 

It’s a crucial indicator of business performance and market demand for your goods or services. While large revenue numbers are great, it may be difficult to assess your profitability if expenses and other financial obligations are not considered.

Using the previous example, since the store sells $5,000 worth of products in a month, that’s its revenue for that period.

There are two kinds of revenue: gross and net.

The formula for calculating gross revenue is:

Gross revenue = Quantity sold x Unit price

Net revenue, on the other hand, considers factors like discounts, allowances, and product returns. Therefore, its formula is:

Net revenue = Gross revenue - Discounts - Allowances - Returns

Why is revenue important?

Revenue is a vital indicator of whether or not your business is doing well. It further drives future growth and attracts the investment you need to take your company to the next level. Here are some reasons why this metric is critical:

It measures sales effectiveness

Revenue provides a straightforward measure of how well your marketing and sales strategies work. High revenue figures show that your efforts to attract and convert customers are successful. This insight is invaluable as it helps you understand what’s working and where you need improvements. 

It enables businesses to set growth targets

These figures help businesses set realistic and achievable growth targets. By analyzing past revenue data, you can forecast future performance and set benchmarks for success. This process guides strategic planning and motivates your team by giving them clear, measurable goals for which to strive.

It attracts investors

A consistent or growing revenue stream suggests that your business model is working and that there’s demand for your product or service. When investors see robust figures, they’re more likely to provide the funding needed to scale your business. This can open new opportunities, from expanding your operations to entering new markets.

Does cashflow mean profit?

Profit and cashflow are crucial concepts every business owner must understand. But does cashflow mean profit? Mistaking one for the other can lead to financial missteps. 

Cashflow refers to the money moving into and out of your business over a period, excluding credit or bank balances. Profit, on the other hand, is the money left after all costs, including depreciation and amortization, interests, and taxes are subtracted from revenue. 

While cashflow is crucial for understanding an organization’s short-term liquidity and operational viability, profit provides a more long-term overview of its financial health.

Difference between revenue and cashflow

A key difference between revenue and cashflow is that revenue considers only sales while cashflow considers expenditure and sales. The table below summarizes the distinctions between the pair.

Cashflow vs revenue vs profit

Understanding the differences between cashflow vs revenue vs profit can help you make more informed decisions in your business. Here’s a breakdown of these key financial metrics.

Using the cashflow-to-sales ratio to understand cashflow vs revenue

The cashflow-to-sales ratio helps to analyze how cash inflow compares with net sales. It reveals a business’ ability to convert sales into cash to meet liabilities.

This ratio is simple to calculate:

Cashflow-to-sales ratio = Operating cashflow / Net revenue

A higher ratio means a business can efficiently convert product sales into real cash. This is a green flag for any modern SMB. The rule of thumb is that the ratio should range between 0.1 (10%) to 0.55 (55%), depending on the industry. 

Let’s revisit our retail store that sells handcrafted products. Suppose the net revenue and operating cashflow in a particular month are $5,000 and $3,000, respectively. In that case, the cashflow-to-sales ratio would be 0.6 or 60% ($3,000/$5,000).

This means for every dollar of net sales, the store generates 60 cents ($0.6) in cashflow. This is a good indicator of effective cash management.

Remember, healthy cashflow makes your business sustainable; there’s really no gain if your outflows cancel your revenue.

Do you know inflation can affect a business’ cashflow? Discover the impact of inflation on SMBs.

Tips to improve cashflow

Having a positive net cashflow is essential to run your business smoothly. To do this, here are some tips to consider: 

Monitor your finances regularly

Keep a close eye on your cash inflows and outflows. This allows you to spot trends and identify areas for improvement, ensuring you’re never caught off guard by a cash shortage.

Efficient inventory management

Unsold goods can tie up your money. So, manage your inventory efficiently and avoid overstocking. Consequently, you can make money available for other business needs, which enhances cashflow.

Offer options for flexible payments

Delayed payments can hinder a company’s objectives. Barclays research in 2022 reported that 2 in 5 SMBs have failed to pay their staff on time due to late payments. Therefore, encourage customers to pay sooner by offering early payment discounts. This can improve cash inflow, giving you more liquidity to cover expenses and invest in growth opportunities.

Negotiate better payment terms with suppliers

You can also extend your payment terms with suppliers. This gives you more flexibility and time to pay, easing the strain on your cashflow. Furthermore, a business owner can work on improving supplier relationships to enhance cashflow. 

Review your pricing

Are you keeping up with inflation? It’s excellent to review and update your prices regularly to ensure they cover all costs and generate a profit. Doing so can help maintain a healthy balance between competitiveness and profitability.

Explore financing options

Consider short-term funding solutions like invoice factoring or revenue-based financing. These options can help bridge liquidity gaps and provide the funds you need to sustain and grow your business.

4 tips to improve revenue

Boosting your revenue is a clear sign that your business is thriving. Here are some engaging tips to help you optimize your business income:

1. Increase sales volume

This is an effective way to boost sales. You can consider creative marketing strategies to attract new customers and encourage repeat purchases. You can also engage in social media campaigns, special promotions, and excellent customer service to help drive more sales.

2. Expand your product offerings

Introducing new products or services can tap into a wider audience and meet more of your customers’ needs, ultimately increasing your revenue streams.

3. Raise your prices

If the market permits, consider adjusting your pricing strategy. Even a small increase can significantly boost your profit margins, especially if your product or service is in high demand.

4. Offer premium services

Develop premium service packages that offer additional value to your customers. By providing exclusive benefits, you can increase revenue per customer. Also, encourage customers to buy complementary products, which further enhances their utility and boosts your sales.

Enjoy expert financing options with Stenn

Cashflow and revenue are two crucial concepts for your SMB’s financial health. While revenue shows top-line growth, cashflow ensures you have the fuel to keep your engine running. Comparing both metrics and noticing their differences will give you the power to promote sustainable growth and confidently sail through difficult times. 

Though cashflow may be critical to a business’ growth, shortfalls can occur. Consequently, Stenn is here to provide the necessary support so you are fueled for growth. Our online platform smoothes out the process, making it possible to request financing with minimal paperwork and without collateral.

This quick and easy access to capital unlocks the cash in unpaid invoices and improves your cashflow position. Explore Stenn’s financing options to see which fit your business model and can help grow your finances.