How Are Cash Flow and Revenue Different?
Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company’s sales and marketing, whereas cash flow is more of a liquidity indicator. Both revenue and cash flow are used to help investors and analysts evaluate the financial health of a company.
Key Takeaways
- Revenue is the money a company earns from the sale of its products and services.
- Cash flow is the net amount of cash being transferred into and out of a company.
- Revenue provides a measure of the effectiveness of a company’s sales and marketing, whereas cash flow is more of a liquidity indicator.
- Unlike revenue, cash flow has the possibility of being a negative number.
Understanding Revenue
Revenue is the total amount of income generated by the sale of goods or services related to the company’s primary operations. Revenue is often referred to as the top line because it sits at the top of the income statement. Revenue represents the total income earned by a company before expenses are deducted.
Although revenue is often used interchangeably for sales, the two terms are distinctly different. Revenue is all-encompassing, meaning it includes all types of income, such as money earned from investments in a bank or interest income from bonds. Conversely, sales is only the amount of money generated from selling a good or service.
However, companies can report their revenue differently, depending on the accounting method used and their industry. Companies in the retail sector, for example, typically report net sales instead of revenue, because net sales represent the sales revenue after merchandise returns.
Revenue can be broken down and listed as separate line items on a company’s income statement based on the type of revenue. For example, many companies list operating income separately, which is the money earned from a company’s core business operations. Conversely, non-operating revenue is the money earned from secondary sources, which could be investment income or proceeds from the sale of an asset.
Accrued Revenue
Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid by the customer. In accrual accounting, revenue is reported at the time a sales transaction takes place and may not necessarily represent cash in hand. Revenue eventually impacts cash flow figures but does not automatically have an immediate effect on them.
Unearned Revenue
Unearned revenue can be thought of as the opposite of accrued revenue, in that unearned revenue accounts for money prepaid by a customer for goods or services that have yet to be delivered. If a company has received prepayment for its goods, it would recognize the revenue as unearned, but would not recognize the revenue on its income statement until the period for which the goods or services were delivered.
Sources of Revenue
For some organizations, revenue can come from other sources than the typical selling of a product or service. The types of revenue and its source depend on the company or organization involved.
Real estate investors might earn revenue from rental income. Revenue for federal and local governments would likely be in the form of tax receipts from property or income taxes. Governments might also earn revenue from the sale of an asset or interest income from a bond.
Charities and non-profit organizations usually receive income from donations and grants. Universities could earn revenue from charging tuition but also from investment gains on their endowment fund.
Understanding Cash Flow
Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a company. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges.
Cash flow differs from revenue in that is not accrued. Instead, cash flow tracks actual cash in hand and the cash that flows in and out of the company. The critical importance of cash flow lies in the ability of a company to remain functional. Companies must always have sufficient cash to meet their short-term financial obligations.
Cash Flow Statement
Cash flow is reported on the cash flow statement (CFS), which shows the sources of cash as well as how cash is being spent. The top line of the cash flow statement begins with net income or profit for the period, which is carried over from the income statement. If you recall, revenue sits at the top of the income statement; after all expenses and costs are subtracted, net income is the result and sits at the bottom of the income statement. The locations are why revenue is often called the top-line number, while net income or profit is called the bottom line number.
Net income is the starting point for a company’s cash flow analysis. All cash activities that a business engages in are added or subtracted from the company’s net income. Those activities are broken down into three sections on the cash flow statement.
Cash Flow from Operating Activities
Changes in cash from current assets and current liabilities, which contain short-term items, are listed within cash flow from operations. Accounts receivables, which is money owed by clients that are collected, are recorded as cash in this section. Also, accounts payables, which are financial obligations owed to suppliers, are recorded as operating activities when they’re paid.
Cash Flow from Investing Activities
Any cash generated or paid from long-term assets is recorded in the investing activities section. For example, purchases of plant, property, and equipment such as a new manufacturing building are recorded here.
Also, these activities include purchases of vehicles, office furniture, and land. Credits to investing activities usually are due to the sale of assets such as the sale of a building or a division of the company. In short, any long-term investment purchase or sale that impacts cash gets recorded as investment activities.
Cash Flow from Financing Activities
Companies typically finance their business in one of two ways: Debt or equity financing. Cash received from issuing stock, a bond, or borrowing from a bank is recorded as cash flow from financing activities. Outflows of cash in this section can include paying dividends, repurchasing stock, paying down a loan or bond.
Revenue should also be understood as a one-way inflow of money into a company, while cash flow represents inflows and outflows of cash. Therefore, unlike revenue, cash flow has the possibility of being a negative number.
Example of How Revenue and Cash Flow Differ
Below is the income statement and the cash flow statement for Apple Inc. as reported in the 10Q on June 29, 2019.
- Net sales (revenue) was $196 billion for the period. Apple lists revenue as net sales because the company typically has merchandise returns, which are subtracted from the revenue figure.
- Net income of $41.5 billion was recorded for the period and is located at the bottom of the income statement.
- All of the items listed are either added-to or subtracted-from revenue (the top line) to arrive at net income (the bottom line).
The cash flow statement for Apple Inc. is shown below.
- The net income figure of $41.5 billion is carried over from the income statement and is added to cash and cash equivalents to create the starting point for the CFS.
- The three sections of the statement are highlighted in blue and include operating, investing, and financing activities.
- At the bottom of the CFS, all of the inflows and outflows are netted to arrive at the cash position of $52 billion for the period.
We can see that the cash flow statement shows the debits and credits to the cash position of the company. However, revenue is the money earned from sales and other various income-producing activities.
It’s important to note that a company could have a significant amount of cash flow but weak revenue generation. For example, if a company took on new debt, it would be cash positive but would have no impact on revenue. Conversely, a company could be generating a lot of revenue but is burning through cash, because the cost to run the company is too high. Companies with a lot of debt payments also tend to have poor cash flow despite generating billions in revenue.
Both revenue and cash flow should be analyzed together for a comprehensive review of a company’s financial health.
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