Learn to think in terms of cash flow

Is the cat in the picture climbing the stairs, or running down them?

Up, down – it’s all a matter of perspective. It’s a similar story with your annual financial statements: what you read from the numbers and how you interpret them depends heavily on your existing understanding and background knowledge of the underlying concepts. Whether the numbers are good or bad is often simply a matter of perspective; it depends on what the focus of the assessment is.

While graphics like the one pictured above are going viral on Pinterest and Reddit and are created to produce an optical illusion, the purpose of financial statements is to provide clarity. Some terms and terminology can be confusing and are often mixed up, even though they are fundamentally different concepts. An example of this is sales and cash flow. Let’s see how the two differ below.

What is meant by turnover?

Sales (the correct business term is ‘turnover’, we will stick to the colloquial term sales below) refers to the total of all sales of products or services in CHF (or any other currency) within a specific reporting period, which typically corresponds to a financial year. So the total of all income from 1st Jan until 31 Dec simple so far.

The English counterpart for this is sometimes used: “revenue” – although caution is advised here: sometimes revenue is also erroneously equated with profit. In order to avoid this potential confusion, one also speaks of “top line revenue” – top line because sales are the very top item in the profit and loss account.

How is profit different from sales?

The profit is calculated by subtracting the costs incurred in the same period from the turnover for a specific period. All expenses for wages, rent, purchases of goods, etc., as well as “depreciation”, i.e. the theoretical loss in value of your company’s assets, are deducted from sales. All these expenses are listed neatly in the income statement, the number that remains at the end corresponds to the profit made (or loss if the number is negative). Still simple so far! 

And what is cash flow?

So far we’ve only looked at how much revenue we’re making and how much of it is left as profit at the end. These terms are attributable to the income statement.

The decisive factor for the survival of any company is how high the “cash flow” is that results from the operational activity. That means how much money actually flows into the company and how much money flows out again. From this it can be deduced how «liquid» our company is.

Liquidity is often figuratively equated with water or oxygen, without which no company can survive – you can also express it in the cold language of numbers: Liquidity is what you need to meet your short-term obligations: Paying your employees wages, the monthly rent, and your supplier invoices on time.

There’s an old truism that says: ‘If you have cash flow under control, you don’t have to worry about the future of your business’.

There’s definitely something to it. The cash flow, as shown in the cash flow statement, is akin to the heartbeat of your company. Deviations and irregularities are a warning sign and should be investigated at an early stage.

How does cash flow differ from sales?

The main difference between the two concepts of cash flow and revenue is what exactly is being measured. Everything that could be sold is added to the income, regardless of whether the invoice generated with it is paid or not. In contrast, a sale is only taken into account when calculating the cash flow if an invoice has actually been paid.

Turnover is a very one-dimensional consideration: you sell a product for CHF 50,000 and generate income of CHF 50,000. When and whether your customer will pay and the cost that will still be incurred for the provision of services on this 50,000 turnover is not taken into account.

CHF 50,000 positive cash flow, on the other hand, changes your starting position fundamentally. All costs have already been paid here, and at the end of the day we actually have the 50,000 in the cash register as additional liquidity and can spend this money again.

What the cash flow shows you, and what sales say nothing at all about, is whether your business is sustainable and profitable. Therefore:

An order over CHF 50,000 is of no use to you at first. The decisive factor for the success of your business is how much of this CHF 50,000 stays with you, or to put it another way, how much cash flow you generate with it.

The three dimensions of cash flow

Up to now we have assumed the so-called “operative” cash flow, i.e. how much cash flow is generated by your operational activities (sales of your products and services). This metric is the most important cash flow metric because it shows at a glance how sustainable your business model is. Due to this importance, cash flow usually means this operating cash flow.

Liquidity also arises (or disappears) from investment and disinvestment activities, for example when you sell fixed assets that are no longer required (this then results in additional, positive cash flow), or when you invest in your equipment fleet (negative cash flow). Again, the resulting cash flow has nothing to do with profit or sales of your company. The third dimension is cash flow resulting from financing activities – this measures the cash flow from loans that are taken out and repaid.

Made a profit, but still losing money in the account!

Can I make profit and still lose money?

In a nutshell – yes. In fact, it is very likely that fast-growing companies in particular will sooner or later be confronted with this phenomenon. Why? Because, as a rule, a lot is initially invested in phases of growth, be it in additional staff, stocking up the warehouse in order to cope with the higher volume or in marketing measures.

The following example illustrates what this looks like in practice:

Profit, but still a loss on the account. Presentation: TRESIO

Our example company made a net profit of CHF 80,000 – yet at the end of the year, it had CHF 30,000 less money in the bank account. Let’s take a closer look at what happened there:

  • CHF 15,000 of depreciation have reduced the profit. However, we didn’t have any money outflow in the bank account for this – so we can add up this amount to company’s Net Earnings.
  • CHF 100,000 of sales were sold on account. Accordingly, this money did not flow into the account, but the position of debtors in the balance sheet increased accordingly – we have to deduct it from the Net Earnings.
  • The warehouse has decreased by CHF 20,000 compared to the previous year – thanks to our liquidity. So, it is: +CHF 20,000.
  • We had to pay our suppliers quicker, than in previous years, so our creditors have decreased accordingly. However, longer payment periods would protect liquidity, which means that this decrease of CHF 25,000 fully impacts the bank account.
  • Finally, a loan was repaid (CHF 15,000) and a dividend of CHF 5,000 was distributed to the owners – both items that do not appear in the profit analysis, but nevertheless have a negative impact on our liquidity.

The bottom line is a cash outflow of CHF 30,000 – despite a respectable net profit of CHF 80,000! If we don’t have the appropriate reserves from previous years, we’ll have a problem and – despite profitable operations – could get into serious trouble.

This confirms our initial thesis: the decisive factor for the survival of a company is not primarily how much turnover is achieved, but where this money goes.

It is therefore all the more important to keep a close eye on cash flow development, especially in growth phases. In the annual financial statements of growing companies, the starting point is typically such that the sales figures are pointing steeply upwards, but at the same time the cash flow is developing negatively. Again: Turnover does not contribute to the survival of a company at all, as long as no positive cash flow can be generated with it.


Understanding the concepts of cash flow and sales/revenues is absolutely essential to the survival of any business. Consider the cat optical illusion. Don’t be blinded by sales figures, learn to think and plan in terms of cash flow.

TRESIO makes your cash flow visible – test it now for free!

Parts of this article first appeared on April 13, 2020 as a guest article on www.swisspeers.ch .