Note for finance gurus: hey, this article isn’t for the accounting wizards, economic masterminds, or finance ninjas out there. We’re keeping it simple and to the point. If this feels like child’s play, it’s because you’re already a pro in this area. Keep working your magic!
We often talk about revenues, turnover, and cash flow as if they were the same thing, but there’s a big difference between them. Here, we’re diving into what makes them unique so you can navigate the financial seas like a well-prepared scout! 🕵️
Imagine you’re running a booming ice cream business. 🍦
Summer’s coming, and local cafes are buzzing to stock up on your ice cream. May arrives, and you’re already in full swing—machines are running, your team’s in high gear.
To kick off production, you need raw materials; after the initial purchases, here’s what your expense sheet looks like:
By the end of May, you look at the expenses and nearly faint - €3,000 spent, and no cash flow in sight!
But hold on; it’s just a temporary scare! You’ve cranked out 3000 ice creams, each priced at €2, giving a total value of €6000. Boom! That’s your revenue.
Revenues are the total value of the goods or services generated over a specific period. In this example, the €6000 represents the value of ice cream produced in May.
Moving forward with our ice cream factory journey... June is the moment of truth: time to deliver. You send out invoices, and here’s the result:
After deliveries, you check your spreadsheet and proudly see that your turnover for the month stands at €5000! But wait, there’s more: a bank app notification shows a €1000 transfer from Urban Oasis. Your other two clients have let you know they’ll pay next month.
So, in June, besides the generated turnover, you’ve actually received €1000 in cash flow!
The difference between turnover and cash flow is critical in business management. Turnover represents the value of billed sales within a period, regardless of whether the payment has been received. Cash flow, on the other hand, is the actual cash collected, which might not match the turnover due to client payment timelines.
Got it? Here’s the breakdown:
But why focus on revenues generated over a specific period instead of turnover or cash flow? simple: it gives a true picture of your company’s economic health!
Picture this: you spend €3000 in May for ice creams worth €6000, but you haven’t seen a penny yet. If you only look at turnover or cash flow, it seems like nothing’s moving. But you’ve created €6000 in value! This shows that your business has serious economic potential, even if that value hasn’t yet turned into cash flow.
Focusing on revenues provides a more accurate, honest view of business performance. This helps assess whether your operations are truly generating value over time, forming a solid base for strategic, financial, and operational decisions. This perspective is crucial for long-term success, enabling you to navigate cash flow fluctuations confidently and recognize the real value your business creates.
How does this apply to project-based businesses? The process is the same. Imagine a project worth €100,000 that spans three months, from July to September. In the first month, your team completes 60% of the work, focusing on analysis, proposal creation, and design. August rolls around, and everything halts—your team and suppliers are on vacation 🏖️. September, the delivery month, wraps up the remaining 40% of work.
So, how are this project’s revenues spread across three months? it all depends on the percentage of work completed each month!
If you’re still reading, you’ve already grasped the critical importance of tracking project progress. At wethod, we do this with project status: a simple, consistent system that lets every project manager keep a close eye on their jobs. This tracking not only simplifies day-to-day management but also enriches the company’s financial reporting with valuable insights. We’ll dive deeper into this in a future article.
Wondering what happens when a project stretches beyond year’s end? congrats—you’ve hit expert territory! No worries, we’ll explore this in due time 🐎.
Keep track of your business’s created value without stress, thanks to intelligent software.
If your business is project-based, spreading out revenue over time is essential to gauge performance and plan ahead. Not sure where to start? turn to wethod: it automates flows and procedures, keeping your financial reports consistently updated and reliable.
With our app, you’ll always stay on top of production and earnings, thanks to its automatic project synchronization with reporting. It’s the perfect tool for monitoring projects and business opportunities, giving you a complete overview of company performance and growth.
Curious to simplify your company’s daily management? Request a demo and see how it can change your workflow!
Already using wethod? you now know the importance of the Friday routine 😉
