Revenue, Profit, Margin, and Cash Flow are different things, but they all relate to money. You may feel a sale is done as soon as the money hits the account and you can see the amount. But you still have to make the amount work for you, by turning it into revenue, costs, profit, margin, and cash flow. Some people think these things sound too difficult to be used by a small-business owner who isn’t a finance expert, but it is actually quite easy. However, you can trick yourself into thinking your small business idea is healthier than it is by not clearly distinguishing between the various types of money.
The money you earn when you sell your product or service is your revenue. If you sell 5 service sessions at 40 each, your revenue is 200. If you sell 10 handmade items for 15 each, then your revenue is 150. Revenue is what comes in before subtracting anything. Revenue is good and important to know, but it doesn’t tell you how much you keep. A new business owner can get excited about their revenue numbers, but you also need to look at your costs, or else you may make too low of a price.
The remaining money after the costs are subtracted is close to your profit. If your revenue of 150 needed 70 for materials, packaging, payment-processing fees, and delivery supplies, you have 80 before other expenses. This is closer to the profit thinking you will learn, but you can keep this simple for the moment. Revenue is not what you keep. If your cost list is more than your price, a business is still going to have trouble.
Margin gives your profit a context relative to the price. Margin is the money you have left after you remove the direct costs from the price. For example, if you sell an item for 30 and the cost for making and delivering it is 18, you have 12 left before removing other expenses. This margin has a lot to do with whether your offer will cover all the rest of your business expenses, in addition to the one sale. A lower margin is okay for some kinds of business models, but you need to take extra care with it. Without understanding your margin, you’re just guessing at your price.
Cash flow is something different. Cash flow is simply when you get paid when and spend your money. A business can make a profit in the long run but still have financial problems if they must spend money before getting paid. For example, you might buy materials this week, pay for a subscription next week, and get paid by your customers at the end of the month. Your cash flow determines if you can pay your expenses when you need to, or if you have to find a way to get more money. Cash flow is at least as important for a small-business owner as the price is.
Here is an exercise for trying to tell them apart: Think about one of your sample sales and write about it in your notebook or a simple spreadsheet. Start with the total of what the customer pays, and call this the revenue number. Then list your specific costs tied to this sample sale. Next, subtract these costs and write the total that is left. Near this total, add an extra note about the margin. Does this offer leave you with enough money, or does it leave very little? Finally, add notes about timing. Which costs must be paid before making the sale? Which costs are paid on a regular, monthly basis? When do you get paid from the customer?
You can learn more about how to tell revenue, profit, margin, and cash flow apart and what you can change with this exercise. Maybe you price your offer lower than your expenses for the amount of work you do. Maybe your revenue looks good because you are overlooking your small regular expenses. Maybe the margin is fine but your cash flow is hard because you have to buy your supplies ahead of time. This isn’t necessarily a bad thing. You are just making more informed decisions and can change the product, price, or plan before your new business idea depends on hope.
Don’t only ask whether your product or service will sell at the price. Ask what happens if people do buy at this price, by asking what is your revenue? What is your cost? What is your profit? Does your margin have enough room? Does your cash flow fit your plan or make it more difficult? You get a better sense of whether your simple one-page business plan is doable by answering these questions, which helps you ground your ideas in numbers you can track.