“Revenue is vanity, profit is sanity, cash is reality”
This is a simple saying that helps business owners keep things in perspective. But what does each term really mean and how are they different?
Revenue is the term that we use for the total amount of income that comes into a business for services provided to the market. In fact, the origin of the word comes from ‘to return’. In other words, what comes back, returns, for what we provide to the market.
But the catch is, when listed on a profit and loss statement, which where most business owners look, revenue is based on what has been invoiced, which is not the same as cash in your bank account.
An invoice is fundamentally a promise to pay (think in-voice), it’s not actual cash.
Along the same lines, profit on a profit and loss statement is where a lot of business owners look to see how they are doing in business, ie are they making money. However, we can’t eat profit, or use profit to pay for something.
At the end of the day, turning profit into cash is about 2 critical things.
Firstly, how quick we get paid once we invoice.
Secondly, how quick we pay our suppliers.
Fundamentally to improve cash flow we must speed up, getting paid and within reason, slow down how quickly we pay.