New to owning a small business? Then listen up.
In the initial phases of small business ownership, the only thing on your mind is probably revenue, revenue and revenue. All you want to do is generate as many sales as you can to get a good footing in the market and to pay off any small business loans you might have. However, after a while you cannot just rely on revenue as a benchmark for success, and this is where profits and cash flow come into play. Any business—large or small—won’t last very long unless there’s a steady stream of profits coming in.
While revenue, profit and cash flow definitely correlate with each other, they can also be very distinct. Here’s a simple breakdown for small business owners:
Revenue is how many small businesses measure success. Essentially, revenue is every single dollar and cent that your company makes. If you’re a hardware store owner and you sell 50 rakes in one week for $10 each, then your revenue is $5,000. Yep, it’s that simple.
While revenue is good measuring stick for the demand your business is generating, it doesn’t exactly measure efficiency. That is, how well you are using the revenue that’s coming in? For instance, you may have made $30,000 in revenue on month, but when you factor in bills, salaries, rent and advertising or marketing, that number just got a lot lower.
Revenue is obviously a useful and important method to gauge success. But it’s also very general and unspecific.
When you look at the bottom of your income statement, you’ll see the profit line (also called “net income”). Profit is everything left over after expenses have been paid.
When all is said and done, profit is the most accurate way to tell whether or not you’re running a successful business. Not only that, it’s also a good indicator of your growth potential. If you’re business is constantly churning a profit, it’s safe to say that growth and expansion are in your future.
Also, if you’re ever in the market for a small business loan, profit is what loan providers will want to see.
Cash flow. It sounds simple, but many business owners often misinterpret what it actually means. Cash flow can best be explained as the amount of money your business has on hand at any time. Positive cash flow is a positive indicator for things such as settling debt, reinvesting, paying expenses and more. Negative cash flow indicates that a company’s liquid assets are decreasing.
Revenue, profit and cash are all very important benchmarks on which to measure small business success. We hope that the guide above helps you understand the difference of each, and puts your business in a better position moving forward.
For more small business resources, visit the Capify blog at capify.com/blog.