How Are Cash Flow and Revenue Different?

How are cash flow and income different?

Revenue is the money a business makes from the sale of its products and services. Cash flow is the net amount of cash transferred to and from a business. Revenue provides a measure of a company’s sales and marketing effectiveness, while cash flow is more of a liquidity indicator. Income and cash flow are used to help investors and analysts assess the financial health from a company.

Understanding Revenue

Revenue is the total amount of revenue generated by the sale of goods or services related to the main activities of the company. Income is often called top line because it sits at the top of the income statement. Revenue is the total income earned by a business before deducting expenses.

Although revenue is often used interchangeably for sales, the two the terms are distinctly different. Income is all-encompassing, which means it includes all types of income, such as money earned from investments in a bank or interest income from bonds. Conversely, sales are just the amount of money generated from the sale of a good or service.

However, businesses may report their income differently, depending on the accounting method used and their industry. Companies in the retail sector, for example, generally report net sales instead of revenue, because net sales represent revenue after merchandise returns.

Revenue can be broken down and listed as separate line items in a company’s income statement based on the type of revenue. For example, many companies list operating result separately, i.e. money earned from the basic business activities of a company. Conversely, non-operating income is money earned from secondary sources, which can be investment income or proceeds from the sale of an asset.

Income payable

Accrued revenue is revenue earned by a business for the delivery of goods or services that have not yet been paid for by the customer. In accrual accounting, revenue is reported at the time a sale transaction occurs and does not necessarily represent cash. Revenue ultimately impacts cash figures, but does not automatically have an immediate effect on them.

Unearned income

Unearned revenue can be thought of as the opposite of accrued revenue, in that unearned revenue represents money prepaid by a customer for goods or services that have not yet been delivered. If a business has received prepayment for its goods, it will recognize the revenue as unearned, but will not recognize the revenue in its income statement until the period for which the goods or services were delivered.

Sources of income

For some organizations, revenue may come from sources other than the usual sale of a product or service. The types of income and their source depend on the business or organization involved.

Property investors could derive income from rental income. Federal and local government revenue would likely come in the form of tax revenue from property tax or income tax. Governments can also derive revenue from the sale of an asset or interest income from a bond.

Charities and non-profit organizations generally receive income from donations and grants. Universities could derive revenue from tuition fees, but also from investment gains on their endowment fund.

Understanding cash flow

Cash flow is the net amount of cash and cash equivalents transferred to and from a business. A positive cash flow indicates that a company’s liquid assets are increasing, allowing it to settle debts, reinvest in its business, return cash to shareholders, pay expenses and provide protection against future financial challenges.

Cash flow differs from income in that it is not recognised. Instead, cash flow tracks actual cash on hand and money flowing in and out of the business. The critical importance of cash flow lies in the ability of a business to remain functional. Companies must always have sufficient liquidity to meet their short-term financial obligations.

Cash flow statement

Cash flows are reported on cash flow statement (CFS), which shows the sources of money as well as how the money is spent. The first line of the cash flow statement begins with the net income or profit for the period, which is carried forward 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 is at the bottom of the income statement. Locations are why revenue is often called the higher number, while net income or profit is called the lower number.

Net income is the starting point for analyzing a company’s cash flow. All cash activities that a business engages in are added to or subtracted from the net profit of the business. These activities are broken down into three sections in the statement of cash flows.

Cash flow from operating activities

Cash changes in current assets and liabilities, which contain short-term items, are listed in operating cash flow. Accounts Receivable, i.e. amounts due from customers that are collected, are recorded in cash in this section. Also, accounts payablewhich are financial obligations due to suppliers, are recorded in operating activities when they are paid.

Cash flow from investing activities

Any cash generated or paid from long-lived assets is recognized in investment activities section. For example, purchases of factories, real estate and equipment such as a new manufacturing building are registered here.

In addition, these activities include purchases of vehicles, office furniture and land. Loans to investing activities are generally due to the sale of assets such as the sale of a building or a division of the company. In short, any purchase or sale of long-term investments that has an impact on cash flow is recorded as investing activities.

Cash flow from financing activities

Companies generally finance their activity in two ways: by borrowing or equity funding. Cash received from the issue of shares, bonds or a loan from a bank is recorded as cash flow from financing activities. Cash outflows in this section may include payment of dividends, redemption of stock, repayment of a loan or bond.

Revenue should also be understood as a one-way cash inflow into a business while cash flow represents cash inflow and outflow. Therefore, unlike income, cash flow can be a negative number.

Example of Difference Between Revenue and Cash Flow

Below is Apple Inc.’s income statement and cash flow statement, as published in the 10th quarter of June 29, 2019.

• Net sales (revenue) were $196 billion for the period. Apple lists revenue as net sales because the company typically has merchandise returns, which are subtracted from revenue.
• A net profit of $41.5 billion was recorded for the period and sits at the bottom of the income statement.
• All items listed are either added to or subtracted from income (the top line) to arrive at net income (the bottom line).

Apple Inc.’s cash flow statement is shown below.

• The net income figure of $41.5 billion is carried forward from the income statement and added to cash and cash equivalents to create the starting point for 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 inflows and outflows are offset 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 of the company’s cash. However, income is the money earned through sales and various other income generating activities.

It is important to note that a business may have strong cash flow but low revenue generation. For example, if a company took on new debt, it would be cash positive but have no impact on revenue. Conversely, a business can generate a lot of revenue but burn money because the cost of running the business is too high. Companies with lots of debt repayments also tend to have low cash flow despite generating billions in revenue.

Revenue and cash flow should be analyzed together for a complete review of a company’s financial health.