One of the questions I often get from our clients is why they are making profit & yet they have no money in the bank. So, let’s look at these two reports to understand why.
Cash flow statements and profit and loss statements are two kinds of financial statements that a business owner uses to measure their business' financial health.
The main difference between a profit and loss statement and a cash flow statement is that a profit and loss statement measures the profitability of the business while a cash flow statement shows where your money is coming from, where it's going, and how much cash you actually have on hand at a given point in time.
Understanding your cash flow statement vs profit and loss statement is essential for ensuring a viable, financially healthy business.
Profit and Loss Statement
In many ways, the profit and loss statement is the simplest kind of financial statement to prepare and understand in small business bookkeeping. This kind of income statement records revenue and expenses for each month to see whether the business is making or losing money. This, in turn, will help you work out whether you need to increase your profit margins or lower your expenses to ensure that your business is sustainable.
Cash Flow Statement
Whereas a profit and loss statement tells you whether you're making money, a cash flow statement tells you whether you can pay your bills. As a measure of liquidity, a cash flow statement tracks cash inflows and cash outflows on a day-to-day basis and tells you your cash balance at any point in time.
A negative cash flow may indicate that a company is growing, i.e the business made some investments or some asset purchases. However, if the profit and loss statement shows a loss, a negative cash flow could mean that the company's business model is unsustainable and significant changes need to be made.
If the cash flow statement shows positive cash flow and the P&L statement shows a profit, that usually means that the business is well established. However, for a startup, having a positive cash flow and an overall loss often indicates that the business took out a loan or that the business owner drew on their personal account to keep the business afloat because the actual revenue received wasn't enough to cover their costs.
When to Get Professional Help
Many startups begin by keeping track of their accounts receivable, accounts payable, and cash flow using spreadsheets in Excel. In this case, you would need separate spreadsheets for your cash flow statement vs. profit and loss. However, as your business grows, you might find it more practical to get an accounting system, or to consider outsourced bookkeeping. Whether you decide to do your own bookkeeping or have someone else do your bookkeeping, it's important to see a small business accountant on a regular basis to analyze your financial statements. The accountant will be able to explain the different accounting methods, identify places where you could improve your income and reduce your expenses, and help you with strategic tax planning. Rhina Namsia Bsc., FMVA®., Kyesubire Greigg
FAQs
The main difference between a profit and loss statement and a cash flow statement is that a profit and loss statement measures the profitability of the business while a cash flow statement shows where your money is coming from, where it's going, and how much cash you actually have on hand at a given point in time.
What is the difference between cash flow statement and income statement? ›
The cash flow statement helps an organisation to record the total inflows as well as outflows of cash during a particular accounting period. The income statement is used by an organisation to record all items related to revenues, expenses, gains and losses during a particular accounting period.
What is the difference between P&L and cash flow forecast? ›
The difference between profit and loss and cash flow forecasts comes down to the fact that profits and cash are two distinct things. While profit and loss indicate the amount of money that is left over once expenses have been paid, cash flow forecasts measure the sum net flow of cash both in and out the business.
What is more important, cash flow or profit? ›
Once a debt is paid, or the business sees an influx in revenue, it starts to see positive cash flow again. In this example, cash flow is more important because it keeps the business running while still maintaining a profit.
What is the difference between P&L cash flow and balance sheet? ›
Here's the main one: The balance sheet reports the assets, liabilities, and shareholder equity at a specific point in time, while a P&L statement summarizes a company's revenues, costs, and expenses during a specific period.
Is a cash flow statement the same as a profit and loss statement? ›
The main difference between a profit and loss statement and a cash flow statement is that a profit and loss statement measures the profitability of the business while a cash flow statement shows where your money is coming from, where it's going, and how much cash you actually have on hand at a given point in time.
Is an income statement the same as profit and loss? ›
There is no difference between income statement and profit and loss. An income statement is often referred to as a P&L. The income statement is also known as statement of income or statement of operations. Now that we've answered the question surrounding income statement vs.
Is accounting profit more reliable than cash flow? ›
There are a couple of reasons why cash flows are a better indicator of a company's financial health. Profit figures are easier to manipulate because they include non-cash line items such as depreciation ex- penses or goodwill write-offs.
Why is cash flow statement better? ›
A cash flow statement is a valuable measure of strength, profitability, and the long-term future outlook of a company. The CFS can help determine whether a company has enough liquidity or cash to pay its expenses. A company can use a CFS to predict future cash flow, which helps with budgeting matters.
Can a company have profits but no cash Why? ›
Timing Can Drive Big Differences
For many businesses, the biggest differences between profits and cash are caused by timing differences. That is, the sale (or expense) was earned (or incurred) during the report period so it is on the P&L, but you haven't collected (or paid) it yet so there's no impact on cash.
The three core financial statements are 1) the income statement, 2) the balance sheet, and 3) the cash flow statement. These three financial statements are intricately linked to one another. Analyzing these three financial statements is one of the key steps when creating a financial model.
What are the three main financial statements? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
Does the cost of goods sold go on a cash flow statement? ›
A company's net cash flow from operating activities indicates if any additional cash came into or went out of the business. This includes any changes to net income (sales less any expenses, such as cost of goods sold, depreciation, taxes, among others) as well as any adjustments made to non-cash items.
What is the difference between a statement of cash flows and income statement quizlet? ›
A Statement of Cash Flows shows how much money is retained and reinvested in the company; an Income Statement lists assets, liabilities, and owners equity.
What is the difference between funds flow statement and income statement? ›
The main difference between a fund flow statement and an income statement is that a fund flow statement shows the sources and uses of cash over a period of time, while an income statement shows the revenues, expenses, and profit or loss over a period of time.
What does the cash flow statement tell you? ›
A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency. The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.
What is the difference between cash flow and net income? ›
Key Takeaways. Net Income is the result of revenues minus the expenses, taxes, and costs of goods sold (COGS). Operating cash flow is the cash generated from operations, or revenues, less operating expenses.
