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Understanding the Difference Between the P&L and the Cashflow Statement

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As a business owner, having a solid grasp of your company’s finances is crucial for making informed decisions and planning for the future. Two of the most important financial reports for any business are the profit and loss report (P&L) and the cash flow statement. But what exactly is the difference between the two, and when do you need each one?

In this article, we’ll break down everything you need to know about P&L statements and cash flow reports. Read on to understand how these reports differ, how to use each one effectively, and how having the right financial data guides better business choices. 

If you need help understanding and managing your business’s finances, learn more about KeyPoint Accountants’s experienced accounting services or contact us here.

What is a P&L Report?

A profit and loss report (which sometimes can also be called an income statement) provides a snapshot of your company’s profitability over a specific period of time, typically monthly, quarterly, or annually. The P&L lists all revenues generated and expenses incurred during that timeframe and calculates your Gross Profit, Cost of Goods Sold, Expenses and net profit or loss.

Revenues on a P&L can include sales of products/services, interest income, and any other earnings. Cost of Goods Sold (COGS) represent the costs of any goods purchased that are directly related to that revenue – a good example being in a café or restaurant, where materials such as food, spices, and drinks would be regarded as COGS.

Revenue less COGS equals “Gross Profit” (GP).

Expenses encompass costs related to operations like payroll, rent, utilities, insurances, etc.

Gross Profit less Total Expenses results in Net Profit, or the technical accounting term is usually “Earnings Before Interest, Taxes, Depreciation, and Amortisation” (EBITDA).

Essentially, the profit and loss statement tells you whether your company made or lost money over the time interval covered in the report. It does not take into account cash balances or when funds actually exchange hands or at any particular snapshot in time. The P&L includes all transactions impacting the income statement, regardless of whether cash was received or paid out.

What is a Cash Flow Statement?

While the P&L provides the profitability picture, a cash flow statement depicts your company’s liquidity (i.e. its availability of cash), and thus its ability to meet obligations as and when they fall due. Simply put, it tracks the actual cash inflows and outflows related to your business operations during a defined period.

The cash flow statement is comprised of three key sections:

  • Operating activities – Includes cash generated or spent on normal business operations. For example, cash received from customers and cash paid to vendors and employees
  • Investing activities – Includes cash used to acquire new assets like property, equipment, or securities and cash earned on asset sales
  • Financing activities – Includes cash related to raising money for business operations like receiving loan proceeds or making dividend payments

Adding cash inflows and subtracting outflows across these three areas provides insight into how your company’s cash balance changed over the reporting period and why. Understanding cash flow sources and uses helps guide financial decisions to ensure sufficient funding is available to meet obligations.

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Key Differences Between the P&L and Cash Flow Statement

While both the P&L and cash flow statement offer valuable financial intelligence, there are some important distinctions between the two reports:

Timing
  • The P&L covers a defined time interval like a month or quarter
  • The cash flow statement shows cash transactions as they occur in real-time
Transactions Included
  • The P&L includes all revenue and expenses impacting income
  • The cash flow includes only transactions affecting cash balances
Purpose
  • The P&L communicates profitability for a period
  • The cash flow depicts liquidity and cash management

To illustrate the differences, let’s look at a few examples:

  • If you make a large sale in April but don’t collect payment until May, that revenue would be included on the April P&L but on the May cash flow statement
  • If you purchase equipment by taking out a loan, the expense impacts the P&L but is not included on the cash flow statement
  • Depreciation expenses appear on the P&L but do not affect cash balances, so they wouldn’t show up on the cash flow statement

As you can see, while the P&L provides profitability performance, the accompanying cash flow statement fills in the rest of the picture related to liquidity and cash position.

Why Both Financial Reports are Vital

Though they measure different things, having insight into both profitability (P&L) and liquidity (cash flow) is extremely important for business success. Here’s why:

Identify Growth Opportunities

The P&L statement shows whether your business’s revenue is growing at a healthy pace. If revenue growth is stagnating, it may be time to re-evaluate your product offerings, marketing campaigns, or sales strategies.

Control Costs

Just as important as growing revenue is controlling expenses, which directly impact profitability. The P&L statement enables businesses to analyse spending trends across expense categories over time. This helps identify unnecessary costs to cut back.

Assess Performance

The P&L shows net profit margin, which is an important metric for assessing the overall profitability and health of a business. Tracking profit margins over time – and comparing to industry benchmarks – enables smart business decisions.

Manage Cash Flow

While profitability is important, it doesn’t help much if you don’t have the cash to pay expenses. The cash flow statement shows if and where cash gaps might occur, especially in months where expenses are higher than cash receipts.

Identify Issues

Sometimes a business is profitable on paper but struggling with cash flow issues. Regularly comparing the P&L and cash flow statements helps identify this disconnect and address potential problems before they become dire.

How KeyPoint Accountants Can Help

As trusted accounting experts, KeyPoint Accountants helps businesses of all sizes better utilise their financial data. We provide services to:

  • Prepare accurate, up-to-date financial statements in user-friendly formats
  • Analyse and interpret reports to derive meaningful, actionable insights
  • Provide comparative analysis of performance over time
  • Identify opportunities for improved profitability and cash flow
  • Forecast future performance based on historical trends
  • Advise on profitability goals and cash flow management strategies

With a keen understanding of both the P&L statement and cash flow report, our financial specialists can help you understand the story behind the numbers so you can confidently lead your company to sustainable growth and profitability. 

Let the Financial Data Guide You

The P&L and cash flow statements provide unique but complementary insights into a business’s financial health and operations. Though they use different accounting methods and measure different metrics, having a firm grasp of both reports is critical for executives and managers.

While the P&L evaluates profitability and spending trends, the cash flow assesses liquidity and cash health. Together, these reports help identify growth opportunities as well as potential issues so they can be addressed proactively. Every business should leverage the full insight provided by these two vital financial statements. Contact KeyPoint Accountants today here to discuss how we can help you utilise your P&L and cash flow data to drive better business decisions.

Contact KeyPoint Accountants for Business Accounting & Advisory
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Chris Dobbie

Chris Dobbie is the Principal of KeyPoint Accounting & Advisors, based on the Gold Coast, Queensland, Australia. Chris is a leading Certified Practicing Accountant (CPA) holding a Bachelor of Commerce (B. Com.), Accounting from Griffith University. Chris has over 22 years of professional accounting and taxation experience. Having stepped his way through this family business to now be Managing Partner, Chris, along with his expert team, look after a diverse client base ranging from medium sized businesses to national/multinational businesses. Chris is truly passionate about improving and growing his company's clients businesses, their lives and lifestyle, with a focus on innovative strategic approaches, and strong communication with clients. View Chris's LinkedIn profile.

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