Revenue vs profit vs cash flow

Three numbers are often mixed up: revenue, profit and cash flow. They measure different things, and confusing them is one of the most common reasons small businesses get into trouble.

What you will learn

• The exact meaning of revenue, profit and cash flow
• Why money earned is not the same as money in the bank
• How to calculate all three for one month
• Why a profitable business can still run out of cash

Explanation

Revenue (German: Umsatz) is the total value of what you sold in a period: price × quantity. It says nothing about costs.

Expenses are the costs of running the business in that period, such as ingredients, rent and insurance.

Profit is revenue minus expenses. In this course, "profit" means profit before income tax and before the owner pays themselves.

Cash flow is the money that actually came into your account minus the money that actually went out in the period. Cash flow can differ from profit for three common reasons:

• Timing of payments: a customer may pay an invoice weeks after the sale.
• Purchases of equipment: buying a machine takes cash today, but its cost is usually spread over several years in the accounts (called depreciation, German: Abschreibung).
• Owner withdrawals: money a sole trader takes out for private use (German: Privatentnahmen) reduces cash but is not a business expense.

How these items are treated for tax is a separate question. Ask a Steuerberater (tax adviser) about your own case.

Worked example

Rheinblick Coffee Cart (fictional), one month.

Assumptions: 1,400 cups sold at €3.50 each, paid immediately; one catering order worth €600, invoiced but paid next month; ingredients and cups cost €0.85 per cup sold plus €150 for the catering order; fixed costs (pitch fee, lease, insurance, phone, accounting) of €850; a second-hand cargo-bike cart bought for €4,500 in cash; the owner withdraws €1,200 for private use.

Exclusions: all amounts exclude VAT; income tax, depreciation of the cart and payment fees are left out for simplicity.

Step 1 – Revenue

• Cart sales: 1,400 × €3.50 = €4,900
• Catering: €600
• Revenue = €4,900 + €600 = €5,500

Step 2 – Profit

• Ingredients and cups: 1,400 × €0.85 = €1,190, plus €150 catering = €1,340
• Fixed costs: €850
• Expenses = €1,340 + €850 = €2,190
• Profit = €5,500 − €2,190 = €3,310

Step 3 – Cash flow

• Cash in: €4,900 (the €600 catering invoice is not paid yet)
• Cash out: €2,190 expenses + €4,500 cart + €1,200 withdrawal = €7,890
• Cash flow = €4,900 − €7,890 = −€2,990

The business made a profit, yet its bank balance fell by almost €3,000. If the account started with less than that, Rheinblick could not pay its bills, even though it is profitable on paper.

Limitations: in real accounts, part of the cart's €4,500 would be recorded as an expense each year through depreciation, so the profit figure here is simplified.

Common mistake

Practice activity

Calculate revenue, profit and cash flow on paper for Nordlicht Candles (fictional) for one month:

• 120 candles sold at €16 each. 80 were paid immediately; 40 went to a shop on a 30-day invoice.
• Materials: €5.70 per candle sold, paid this month.
• Fixed costs: €546, paid this month.
• Extra wax for the next three months bought and paid this month: €900 (not used yet, so not an expense this month).
• All amounts exclude VAT; ignore taxes and fees.

Key takeaways

• Revenue (Umsatz) = what you sold; profit = revenue minus expenses; cash flow = money in minus money out.
• Late customer payments, equipment purchases and owner withdrawals make cash flow differ from profit.
• A profitable business can run out of cash if payments come in later than bills go out.
• Plan your cash for the coming weeks, not just your profit.

Next step

In the next lesson, you will sort costs into fixed and variable costs, which is the basis for all later calculations.