Revenue vs. Profit vs. Cash FlowBlaine Bertsch - Founder, Dryrun.com

Revenue vs. Profit vs. Cash Flow

Well, if any of the three are out of whack, your business is in trouble. Before we get into the dangers, let’s take a look at the difference between the three.

So what’s the difference between revenue, profit and cash flow and why should you care?

Revenue Revenue is the total amount of the sale of goods and services.

May also include money earned from other sources such as interest, fees and royalties.

Revenue is generally described in terms of a specific time period.

ie. a particular month, quarter or year

Example A service company invoiced* $100,000 in March

The business has earned revenue of $100,000 for that month.

*In this case, the business is not receiving payment in actual cash, rather it is ‘owed’ $100,000. Once they’ve invoiced a customer, that amount is considered revenue.

Revenue in a given time period can include invoiced money, as well as cash payments that have been made at the time of a purchase.

The Top Line Your revenue appears in the top line* of your Income Statement

*In the example, if you were referring to the Income Statement from the month of March, the top line of that statement would contain the $100,000 in revenue.

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Talking ‘Revenue’ The term ‘revenue’ is commonly used in other business situations

For instance, when discussing:• revenue from a specific product vs. another• revenue earned from a particular contract...or from a specific customer.

In these cases, revenue refers to the income or earnings in each situation but may not refer to a particular timeframe.

‘Revenue’ never accounts for expenses and costs. It simply describes total money earned by the business.

Profit is your revenue minus your expenses.

Profit simply means that you make more money than it costs to deliver the goods or services.

So, if your expenses are $40,000 on $50,000 revenue, you have a $10,000 profit.

Revenue - expenses = profit

Profit

Gross Profit

Calculates the revenue from your goods or services minus the cost of those goods or services (COGS).

It’s important to note that your gross profit only accounts for expenses directly related to the creation of those specific goods and services.

Revenue - COGS = Gross Profit

Two Types of Profit

Net Profit

Calculates the revenue from your goods or services minus the cost of those goods or services (COGS) and all other business expenses.

Your net profit differs from gross profit in that it includes all other business expenses, not just the direct costs. The additional expenses include costs, such as payroll, utilities and taxes.

Revenue - COGS

- Other Business Expenses

Net Profit

The amount and timing of the payments you receive and the expenses that you pay.

If you’re paid in two stages of $25,000 dollars each1. $25,000 at 30 days*2. $25,000 at 60 days**

* So you need to pay all of your expenses for the first month before you get $25,000 to work with.

**You then need to wait an additional month to get the rest of your cash out of the project.

Cash Flow

Revenue, Profit and Cash Flow ConundrumIt can be easy to focus on a single core metric to evaluate the health of your business but that can be dangerous.

If any one of the three cornerstones is out of line, it may kill your business.

Cash Flow

Many businesses have been caught in a cash flow crunch.

Focus on understanding when the cash will land in your bank account and become available for paying expenses.

Profit margins can become very slim when:

• the lowest price often wins a contract• margins are tight• productivity dips• expenses are higher than predicted

When it costs more than expected to deliver, companies end up taking a loss. Too many unprofitable sales will sink a company.

Profit

RevenueCompanies may believe they are financially healthy when their cash flow is strong and projects are profitable...

...but if they haven’t kept their sales pipeline full with new revenue they won’t have enough money over the long term to stay in business.

Track your expected sales revenue, profit margin and maintain cash flow projections on an ongoing basis.

All three are critical for a healthy, growing business.

Track Your Three Cornerstone MetricsRevenue, Profit & Cash Flow

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Blaine BertschFounder Dryrun.com

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