Revenue is what you sold in a period, profit is what is left after all of that period's expenses, and cash flow is actual cash in minus cash out. So a company can be profitable on paper with an empty bank account, because a credit sale counts as revenue before the cash is collected.
Step by step
- 1
Revenue
Recorded when the sale is completed, meaning the goods are delivered or the service is performed, whether the customer pays in cash or on credit.
- 2
Profit
Revenue minus cost of sales and expenses, including depreciation, which spreads the price of equipment over the years it is used.
- 3
Cash flow
Actual receipts minus actual payments during the period, from operations, investment and financing.
- 4
Why profit and cash differ
Credit sales, stock bought but not yet sold, equipment paid for today but depreciated over years, and loan principal repayments, which take cash out without appearing as an expense.
- 5
An example of the gap
This month you sold 100,000, to be collected in 60 days, and paid 80,000 for those goods and the month's expenses. Your profit is 20,000, but your cash fell by 80,000 if you collected nothing from earlier sales.
- 6
Read both statements together
The income statement shows revenue and profit and the cash flow statement shows the movement of cash, so review them side by side every month.
Judging a company by revenue alone is a common mistake. A company with high revenue can be losing money, and a profitable one can struggle to pay salaries because its cash is tied up with customers or in stock.
- why is my business profitable but has no cash
- difference between profit and liquidity