Revenue is not equal to Cash Flow!

A common misconception that persist in the market is that if one earns revenue that will automatically result in Cash Flow. However, a deeper understanding of the Financial Statement will bring out the fallacy of the argument.

Let me explain you with a help of an example-

In the month of April, till 20 th, Mr A sold goods worth 1 lakh each to X, Y and Z. All of them has asked a credit of 45 days which Mr A has obliged as he should have been earning a good 25% from this deal. He relaxed himself as his books clearly showed a whopping 3 Lakhs in revenue with a margin of 1/4 and given the lock down, he decided to close his shop for the month and also give a paid leave to his only employee, Mr Z for the remaining days!

On 2nd May, he decided to re-open his shop. Mr Z comes too and request for his salary. Honoring his word, Mr A opens his Cash/ Bank register to gives Mr Z 10K as his salary. But too his utter disbelief, he finds there is no cash left!!!!

Wait, didn't he earned revenue of 3 lakhs in April? Then where did all this amount go?

The answer to that is a simple one word - DEBTOR!

Debtor's are one of the most important part of the Balance Sheet. However, often we are so engrossed into the Top Line and Bottom line approach that we forget that there is a huge battle in recovering that money which are showing between those lines!

Companies especially startups should realize that whether you are bootstrapped or Funded, everything boils down to the cash that you have in your bank. Effective Debtor Management can save you from many unnecessary trouble and mishandling of it can screw you big time!

Always remember-

Revenue is not always cash. You may have tons of Revenue but zero cash flow!

By the way, Mr X has just received a call from his landlady for the rent. Do you have any suggestions for him?