How are cash flow and revenue different?

Revenue is the money a company earns from the sale of their products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of effectiveness of a company's sales and marketing, whereas cash flow is more of a liquidity indicator. Both revenue and cash flow are used to help investors and analysts evaluate the financial health of a company.

Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Revenue is often referred to as the top line because it sits at the top of the income statement. Revenue represents the total income earned by a company before expenses are deducted. 

Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid by the customer. In accrual accounting, revenue is reported at the time a sales transaction takes place and may not necessarily represent cash in hand. Revenue eventually impacts cash flow figures but does not automatically have an immediate effect on them.

Unearned revenue can be thought of as the opposite of accrued revenue, in that unearned revenue accounts for money prepaid by a customer for goods or services that have not been delivered. If a company has received prepayment for its goods, it would recognize the revenue as unearned, but would not recognize the revenue on its income statement until the period for which the goods or services were delivered.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a company. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Cash flow is reported on the cash flow statement or CFS. 

The cash flow statement shows where a company's money is coming from, and how that cash is being spent. Cash flow includes cash received from revenue as a result of sales. However, cash flow also includes other sources of income that are not classified as revenue, such as cash received from the sale of equipment. These extra sources of money that figure into the calculation of cash flow, but are not normally considered part of operational revenue, also include such things as financing and investing activities.

Cash flow also differs from revenue in that is not accrued. Instead, cash flow tracks actual cash in hand and the cash that flows in and out of the company.

The critical importance of cash flow lies in the ability of a company to remain functional; it must always have sufficient cash to meet short-term financial obligations.

Revenue should also be understood as a one-way inflow of money into a company, while cash flow represents inflows and outflows of cash. Therefore, unlike revenue, cash flow has the possibility of being a negative number. 

For more on this topic, please read "What's the Formula for Calculating Free Cash Flow?"