Revenue vs Profit vs Cash: Which one is most important?

Revenue, profit and cash are all needed to operate a healthy business. But they are very different numbers and tell different stories about your operations.

In the perfect world, your Revenue, Profit and Cash balance will grow at the same rate. Unfortunately, it’s common for businesses to generate a 25% increase in revenue but profit remains flat and cash disappears.

This is what I refer to as the Busy But Broke syndrome. Everyone in your business is busy but at the end of the month, you have nothing to show for all of the hard work.

The key to growing revenue, profit and cash at the same time is understanding each one and how they work together.

Revenue Definition

Revenue is the money earned from the sale of your services. It is the total amount you charged your customers for the services you provided. For example, if you sell a $1,000 service to 15 customers during the month, your monthly income statement will report total revenue of $15,000.

Nicknames: Sales, Gross Income and Top Line.

Report: You’ll find revenue on your income statement aka profit and loss statement or P&L.

Revenue measures the effectiveness of the company’s ability to convert leads into sales.

Profit Definition

Profit is the result of a basic math formula: Revenue – Expenses = Profit.

Nicknames: Net Income and Bottom Line.

Report: You’ll find profit on the income statement.

Profit measures the company’s ability to sell services at a price higher than it cost to deliver the service (COGS) and operate a business (overhead).

Cash Definition

Nothing mysterious here…cash is simply the amount of money you have in your business bank account. It’s reported on the Balance Sheet.

A healthy cash balance is a good indicator of whether the company will be able to pay employees, vendors and lenders on time.

Full Financial Picture

To see the full picture, you need to look at your Cash Flow Statement. It will help you reconcile the total revenue the company earned to the profit and to the actual amount of cash leftover at the end of the month.

How do I know I am growing at a healthy rate?

In the perfect world, your revenue, profit and cash will grow at the same rate. If revenue increased 25%, you would see a 25% increase in profit and cash.

The goal is to increase revenue while maintaining the same profitability level.

Too often, companies focus on increasing revenue and do not pay attention to maintaining profitability so their financial statements end up looking like this example.

This is a sign of unhealthy growth. Revenue increased by 25% but the company was not as profitable and lost cash. You’ll notice this if you’re busy but have not to show for it at the end of the month.

It is always good to paint the picture of what the perfect world could look like. But, the perfect scenario rarely happens in business. Here’s a look at what your goal should be in the real world to maintain profitability while you watch revenue, profit and cash increase. Your real-world picture should look something like the example below.

Revenue increased by 25%
Profitability was maintained at 15%
Cash increased depending on how much money was used to purchase new equipment, make distributions to owners or pay taxes.

This winning combination is the secret to growing a healthy company.

Bottom Line

An increase in revenue does not automatically lead to higher profits and more cash in the bank.

Check out these hiding places if your revenue increased but profitability decreased:

Too many discounts given to customers
Labor expense increased due to inefficiencies or inability to handle the extra work load
Cost to acquire new customers increased (marketing ROI decreased)

If revenue and profit increased, but cash decreased, review these accounts to determine where the cash disappeared to. Remember, the profit formula is Revenue minus Expenses. The formula does not consider:

Accounts Receivable (AR) – the cash your customers owe you for the services provided. Accounts receivable is created when a business provides services today but allows the customer to pay 30 days later. When you provide the service, revenue is reported on the income statement and hopefully, profit increases. But, the revenue and profit have not converted to cash yet. It is stuck in accounts receivable. This is referred to as the accrual basis of accounting.

Review your Accounts Receivable report to determine if customers are paying you on time. If too much cash is stuck in AR, consider limiting the number of customers you extend credit to or ask for a down payment before you start work to help with cash flow.
Assets – cash is also used to buy inventory, replace an old printer, or buy a new vehicle.
Cash is also used to repay the principal portion of loans or make equity distributions to the owners.

Nothing in business happens by accident. It’s fun to watch revenue increase, but it takes all three – revenue, profit and cash – to grow a financially strong business.