“I made a million dollars last year!”
Ok, we didn’t (but 2020 isn’t done yet :). But how many times have you heard an announcement of how much a company has made, and assumed it was cash in the door? Many of us do. Today we want to bring to your attention a vital difference in terms: Cash v. Revenue
Revenue is how much you earn. Depending on your accounting method (cash v. accrual anyone?), revenue may be booked to your sales category once an invoice is sent. even though payment may not be received for months or more. So while it may appear that you’ve earned $1,000,000, the reality could be far less if the cash hasn’t been received yet.
Why is this important? First, because understanding how terms are used make it easier to make strategic decisions about how your business is doing and where you should go next. For example, if you are making decisions based on revenue (i.e. growth, hiring, etc), you may find that you aren’t able to make those moves until the money actually comes in. Second, one of the main reasons that companies fail is because of cash flow issues (a study says that up to 60% of failed businesses cite cash flow as an issue). One of those issues is an assumption that goods or services billed are automatically assumed to be cash received, and when that payment timeline doesn’t line up with when expenses are due, it can be a quick spiral into debt or loss or both.
So what do you need to do? First, run both your balance sheet and profit and loss statements. Your balance sheet will show how much money you have in the bank, and your profit and loss statement will show how much you’ve earned. You’ll be able to view both numbers and then make appropriate decisions on next moves, as well as a clear picture of where the business stands.
Don’t have financial statements yet? Not sure how to get started? We’ve got an answer for that. Check out our Starter Kit, which we built with you in mind!