“Revenue is vanity, profit is sanity and cash is king!” – Alan Miltz
Cash flow, revenue and profit are important metrics to determine the success of your business, but they are very different concepts. Your business may have great margins, healthy order books and a large receivable balance but access to cash is still a struggle.
Here we’ve discussed why cash is so important and the differences between revenue, profit, and cash.
Revenue is the total sales your business makes before any expenses are deducted. It is important to grow revenue to grow your business, however, this is not the most reliable measure of success. You could be making substantial revenues and be chasing big orders but still be loss making if your expenses are too high.
Profit is the financial gain your business is making on its products or services. It is the amount that remains in your business when costs are deducted from revenue earned. To make a profit, your revenue must be higher than your expenses. Revenue is calculated at the time it is earned, rather than when cash is received. Similarly, expenses are calculated at the time the purchase is made, rather than when cash is paid.
While profit is a great measure of success, being profitable does not mean your business is thriving. For example, you may sell your products with good margins but must wait 30+ days to get paid, in the meantime you are required to pay your suppliers, employees, and other operational expenses. If you are unable to meet your financial obligations in a timely manner, this will significantly impact the success of your business.
Cash flow is the total amount of cash transferred in and out of your business at any given time. It is the difference between inflows (money received) and outflows (cash paid).
For any company to survive, cash flow is the most important financial factor. Your business could have high revenue and good margins, but if there’s a mismatch between cash in and cash out, you could have negative cash flow. While a business can manage negative cash flow in the short-term if you have cash reserves, eventually a business must focus on creating positive cash flow to pay operating expenses and support growth.
How to Maximise Your Cash Flow
It’s more important than ever to review and take stock of your cash flow position. Find out more about effective cash flow strategies here: 5 Agile Cashflow Strategies for this Financial Year.
We know it’s not easy to plan when most of your incoming cash flow is tied up in receivables. To find out more about how Timelio can improve your cash flow, contact the Timelio team at email@example.com or on 1300 38 63 63.