Sales, Revenue, Profit and Cash Flow – What’s the Difference?
Small business owners have enough on their plates – they certainly don’t have time to become accountants. But having a basic understanding of the numbers behind your business can be crucial to your company’s success. Data provides insights that help answer basic business questions, like “Can I afford to take on a new expense?” or “How much will I need to increase sales in order to boost my profits?” And you can turn those insights into sound decisions and actions that improve your business.
One set of business data terms that often confuse small business owners are the terms: sales, revenue, cash flow and profit. Owners may think they are turning a profit just because they have high sales numbers. Or they can’t understand why they are having difficulty paying their business bills, although their accountant tells them they are making a profit. So, what is the difference in sales, revenue, profit and cash flow???
Let’s start with sales and revenue. Sales are the proceeds from the selling of your goods or services to your customers. In contrast, revenue is the total amount of income generated by your company’s primary operations. For some companies, sales make up one just component of a company’s revenue, because they generate receipts in other ways, too. For many other complies, the only revenue they have is from the sales of their goods or services, so the amount of sales and revenue are the same thing. This is why the terms sales and revenue are often used interchangeably.
Now, what’s profit? Profit is basically a function of two things: sales (or revenue) minus your total expenses. The bottom line is: to increase your profit, you must either increase sales; or reduce expenses.
And finally, what is cash flow? Cash flow is the money that is moving (flowing) in and out of your business during the month. Cash is coming in from customers or clients who are buying your products or services. And If customers don’t pay at the time of purchase, some of your cash flow is coming from collections of accounts receivable. Cash is going out of your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable.
Cash flow management is about managing the timing of the cash flowing in and out – this starts to get into things like how quickly do you invoice your customers and how soon do you have to pay your suppliers. One way to think about “cash flow’ is to consider how your business checking account works. If more money is coming in than is going out, you are in a “positive cash flow” situation and you have enough to pay your bills. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdrafts. This is how many businesses get into trouble – you must ensure you have enough working capital to cover all your expenses while you are collecting your receipts. In fact, we’ve seen businesses that have healthy profits, but poor cash flow management. And we’ve seen the opposite: businesses that have good cash flow management, but little or no profit.
There are literally hundreds (maybe thousands) of business terms, and no one needs to fully understand them all. But the next time you are looking at your business reports and trying to determine what actions you need to take to strengthen your business, we hope you’ll have a good grasp on what sales, revenue, profit and cash flow mean for your business. Here are a few additional resources, if you’d like more information:
What Is the Difference Between Revenue and Sales?
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