Cash Flow vs Profit and Loss Statement

Keeping on top of your business’ finances requires understanding multiple financial views. Profit & Loss statements and Cash flow statements are two useful financial documents for establishing a clear picture of your financial position. 

Cash flow problems are one of the most common reasons that start-up businesses fail. Making effective cash flow management a crucial consideration for any small business. Profit and loss meanwhile, compares all income and expenses to demonstrate the success of your business model. While these two statements provide unique views, their financial perspectives are both equally as valuable. 

What is a Profit and Loss Statement?

Profit and loss refer to the amount of money your business has left over once all of your costs have been deducted from your total revenue. Your business will be turning a profit if this figure is a positive number, indicating that your business has enough revenue over that period to cover all expenses and have money left over. If your business does not have enough revenue to cover costs, you will be returning a loss, and if your costs are directly equal to your revenue then you have achieved your ‘break even point’.

Profit and loss statements lay out all of your business income and expenses over a period of time, often either monthly, quarterly or annually. 

Profit can be calculated using the following formula:

Profit = Revenue - Expenses

Profit and loss statements can be useful beyond understanding your business’ financial success. With all of your costs and revenue laid out, business owners can evaluate whether they are charging the right amount for their products and see how their expenses are affecting revenue. Additionally, Profit and Loss statements can also be used to create profit projections for future periods, and inform business planning.

Below is a simplified example of what a Profit and Loss statement might look like for an eCommerce business. 

What is a Cash Flow Forecast?

Cash flow forecasts are statements that lay out all of the cash that is expected to come into and out of your business over a given period of time, often weekly or monthly. These statements, if filled out using the direct method of cash flow analysis, will often look like a structured version of your business bank statement. Cash flow forecasts are based on estimates and approximate how much cash your business will have available to cover all cash expenses for the given period. 

These forecasts, unlike profit and loss statements, do not include non-cash expenses such as depreciation. 

The calculation for cash flow will differ depending on whether you choose to use the direct or indirect method. 

Using the direct method, cash flow can be calculated using the following formula:

Net Cash Flow = Net Cash from Operating Activities + Net Cash from Investing Activities + Net Cash from Financing Activities

When using the indirect method, you can calculate cash flow from a profit and loss statement. 

Cash flow forecasts are useful for planning cash investments, business purchases or budgeting for future projects. While positive cash flow is preferable, negative cash flow can be unavoidable as owners reinvest in and scale their businesses.

Below is an example of what a typical cash flow forecast might look like for an eCommerce business.

A Cash Flow Statement vs a Profit and Loss Statement

There are several key differences between a cash flow forecast and profit and loss statement, although neither should be used to replace the other. 

Cash flow forecasts provide a more granular day-by-day view of your finances, breaking down all of your cash outflows and inflows. Profit and loss statements, on the other hand, often group similar costs or revenue streams together to offer a wider view of your financial position. 

As the two financial statements are different, it is important to remember that any business can experience one without the other. For example, it is entirely possible to experience periods of positive cash flow, but return a loss. This can often be due to taking on a loan or using business savings to cover gaps in cash flow. Similarly, a business can also experience negative cash flow and still return a profit. 

There are some situations where you may find one statement more useful than another. For example, when considering increasing your stock levels, owners will find consulting a cash flow forecast more valuable than their profit and loss statements. Using the cash flow forecast, owners can understand whether they will have enough cash on hand to cover the initial costs of restocking and still have surplus cash to cover all other normal operating expenses. In the long term this could improve profit, however it could create a short term cash-flow problem. 

Alternatively, eCommerce business owners may find their profit and loss statements of greater use when considering altering the price of their products due to inflation or other external factors. Additionally, profit and loss statements offer valuable information on the overall success and viability of your business model, and can be used to understand what could be changed to improve the success of your business.

Conclusion

Cash flow forecasts and profit and loss statements are integral to effective financial management within any business. Understanding multiple financial views both on a daily basis and wider business performance level can contribute to improved decision making and business planning. 

For more information on the difference between profit and cash flow, as well as guidance on how to get starting using cash flow statements, forecasts and ratios, download our other eBook chapters.