Sales Revenue Vs. Cash Flow

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There is a strong correlation between your sales revenue and your cash flow. As you get paid for the items you sell, you obtain funds that you use to operate your business. Cash flow and sales revenue do not precisely correlate, but the most sustainable long-term way to improve your cash flow is to increase your sales revenue.

Accounts Receivable

  • If your business extends credit to customers through arrangements such as allowing them 30 days to pay for goods or services, then you will generate sales revenue, but the delay of the financing period will complicate your cash flow. Your accounts receivable, or the sums that are owed to you, will represent assets on your balance sheet but it is not the same as money in the bank because you do not yet have the money in your hand and there is always the possibility that you may not be paid.

Accounts Payable

  • If your business buys materials and supplies on credit, then you may have money coming from sales revenue faster than you have to pay for the expenses you incurred during production. If there is any delay in the time it takes you to pay your employees, such as a bookkeeping system that takes a week to process employee paychecks, this will be the case as well. As a result of these payment arrangements, your beneficial cash flow situation may deceive you into thinking that your financial situation is better than it actually is.

Financing

  • If your company has access to any type of financing, such as a bank loan, business line of credit or business credit card, you are using tools that facilitate cash flow without necessarily improving sales revenue. Although business financing creates a short-term situation in which cash flows easily and abundantly, if you spend loan money freely you will sooner or later run out of financing capital, placing yourself in a difficult cash flow situation as you pay back business loans and credit cards out of current sales revenue.

Debt

  • Paying back business debt places a strain on cash flow, even when sales revenue is good. If your business is in the position of still making payments for expenditures made in the past, then your current sales revenue will not be available to cover current business expenses. Your books may show that you are earning a profit, but you won't have any money in the bank because you are paying principal and interest incurred in the past.

References

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