The Difference Between Cash Flow, Revenue, and Profit

Cash flow, revenue, and profit are three essential financial terms used to evaluate a business's success but are often confused with one another. This article explains the difference between them, their formulas and calculations, and their importance to your business.

What is Cash Flow?

Cash flow is the amount of money that flows in and out of a business over a specific period. It represents the amount of money available to a business for its daily operations, investments, and financing activities. Positive cash flow means the business is generating more money than it's spending, while negative cash flow means the business is spending more money than it's generating.

According to a U.S. Bank study, 82% of businesses fail due to poor cash flow management skills or poor understanding of cash flow.[1]

Cash Flow Formula and Calculation

The cash flow formula is straightforward. It’s the sum of all inflows minus the sum of all outflows. In other words, cash flow equals cash inflows minus cash outflows.

Cash Inflow Examples:

• Sales revenue
• Loans received
• Investment income
• Capital contributions

Cash Outflow Examples:

• Expenses
• Salaries
• Loan payments
• Taxes
• Purchase of assets

Types of Cash Flow: Operating, Investing, and Financing

• Operating cash flow includes cash inflows and outflows related to the business's primary operations, such as sales revenue and expenses.
• Investing cash flow includes cash inflows and outflows related to the purchase and sale of assets, such as property, plant, and equipment.
• Financing cash flow includes cash inflows and outflows related to the business's financing activities, such as loans, dividends, and capital contributions.

Importance of Cash Flow

Cash flow is essential for the day-to-day operations of a business. It enables the business to pay its expenses, invest in new opportunities, and return money to its investors. A positive cash flow means a business can meet its financial obligations, while negative cash flow can lead to financial distress.

74% of SMBs reported experiencing a cash flow issue in the past year, and nearly 40% of small businesses would have to close their doors within two months if cash flow dried up today. [2]

As an e-commerce business, there are several ways to improve cash flow:

• Obtain debt and/or equity financing. [3,4]
• Automate regular payments from clients to reduce the amount of time you spend collecting payments.[5]
• Improve inventory management by having enough stock to meet customer demand while avoiding overstocking, which can tie up cash.[6]
• Align expenses with revenue patterns to avoid overspending during slow periods.[7]
• Forecast your cash flow to anticipate potential shortfalls and plan accordingly.[8]
• Clear out excess inventory to free up cash that can be reinvested in the business.[9]

What is Revenue?

Revenue is the total amount of money earned by a business from the sale of goods or services over a specific period. It’s also referred to as sales or turnover. Revenue is a key performance indicator used to evaluate a business's success.

A business can have multiple revenue streams, such as the sale of products, services, and subscriptions. It’s essential to understand the different revenue streams as they can help identify new growth opportunities.

The revenue formula is simple. It’s the product of the number of units sold and the price per unit.

Revenue = Number of Units Sold x Price per Unit

For example, if a business sells 100 units of a product for $50 each, its total revenue would be $5,000

What is Profit?

Profit is the amount of money earned by a business after deducting all expenses from its revenue. It’s also referred to as net income or earnings. Profit is a critical financial metric used to evaluate the financial health of a business.

The profit formula is straightforward. It's the difference between revenue and expenses.

Profit = Revenue - Expenses

For example, if a business has revenue of $10,000 and expenses of $8,000, its profit would be $2,000.

Types of Profit

There are two types of profit: gross profit and net profit.

Gross profit is the amount of money earned by a business after deducting the cost of goods sold. It’s calculated by subtracting the cost of goods sold from revenue.

Net profit is the amount of money earned by a business after deducting all expenses, including the cost of goods sold, from revenue.

Cash Flow vs Revenue vs Profit

Cash flow is the amount of money available to a business, revenue is the amount of money earned from the sale of goods or services, and profit is the amount of money earned after deducting all expenses from revenue.

Think about it this way: Cash flow, profit, and revenue can be compared to a person’s income, savings, and spending.

Revenue is like a person’s income, as it represents the total amount of money that a business earns from sales. Just like how a person’s income is the starting point for their financial situation, revenue is the starting point for a business’s financial situation.

Profit is like a person’s savings, as it represents the amount of money that a business has left over after deducting all expenses from revenue. Just like how a person’s savings is a measure of their financial health, profit is a measure of a business’s financial health.

Cash flow is like a person’s spending, as it represents the movement of money in and out of a business. Just like how a person’s spending habits can affect their financial health, a business’s cash flow can affect its financial health.

Cash flow, revenue, and profit are crucial financial metrics that every business owner should understand. They enable business owners to make informed decisions about their daily operations, investments, and financing activities. By understanding the difference between them, business owners can maintain the financial health of their business and identify areas of improvement and potential growth opportunities.