Cash flow is perhaps one of the most important KPIs for any business. From small businesses to large enterprises and everything in between, cash flow is paramount, no matter the situation.
Despite this, some may question if revenue is more important, especially when it comes to growing and scaling. Here, we compare revenue and cash flow, and how they affect the growth of a business.
Cash flow measures how much money flows in and out of a business. Businesses with positive cash flow can consistently cover their outgoings, meet financial targets, and reutilise their leftover funds however they wish. Negative cash flow is the opposite of this, and signifies that a company’s expenses and investments exceed its revenue.
Revenue, on the other hand, is often used synonymously with other metrics like ‘sales’ or ‘profit’. It is measured over a given period and determines how much money a company receives from its business activities. By not including costs, revenue may only tell one half of the story.
While both cash flow and revenue are important metrics to consider in a business, they have their own distinctions. Combined, these two metrics lead to a much more detailed understanding of a business’s financial well-being.
Unlike revenue, cash flow is calculated by subtracting outgoings. This provides a more realistic view of what a business is spending its money on and how that money is being used to run the company. Revenue, on the other hand, refers to all income generated through business activity.
This means a business can measure high ongoing revenue figures while simultaneously suffering from negative cash flow. On the other hand, a business that doesn’t accurately track revenue may fail to conclusively understand its competitive market position
Regardless of the size of the operation, your competitive standing in the market, or exactly what your growth ambitions are, cash flow is one of the most important metrics when it comes to scaling a business over time. Here’s why:
Detailed cash flow monitoring offers greater visibility over your business finances. Through such monitoring, growth directors can assign more resources to underdeveloped areas or make informed decisions about the investment opportunities available to the business. All of this is essential to growth and can only be attained through cash flow analysis.
Imagine the following scenario: you’ve conducted the necessary checks and have agreed to invest additional funds into expanding your business into a new territory. Everything goes well, and your business is re-established. However, shortly after, you realise that while your back was turned and your focus placed elsewhere, your operating capital dried up, your expenses were much higher than originally planned, and you hadn’t accounted for a litany of unexpected outgoings. As a result, your expansion was completed, but with such poor cash flow, the vision didn’t last.
All growth requires some form of borrowing. Sometimes, you need essential infrastructure and equipment that you can’t buy with your current assets. Other times, buying property quickly and competitively can help you expand your offering much faster. These strategies all require stability, which positive cash flow provides.
Having a clear picture of the money held within your business can make it easier to pay off current debts. Continued on-time payments of said debts can improve creditworthiness, which can grant access to more lenders, financial products, and better rates.
Although revenue provides a crucial insight into the results of your business activities, cash flow paints a wider picture of overall financial standing.
Without healthy cash flow, growth becomes much harder to plan. No cash flow overview means no accurate picture of your liquidity, which is a non-negotiable measurement when growing a business.
To further enhance your cash flow, consider trade credit insurance. With trade credit insurance, you can extend credit in the knowledge that you’re covered in the event of non-payment. This helps you unlock more predictable and reliable cash flow and stronger credit profile.
Speak to our team today to learn more about our trade credit insurance offerings, and how we can help support your growth ambitions.
Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate the risks associated with bad debt, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, Surety bonds, Business Fraud Insurance, debt collection processes and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.
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