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The difference between the PROFIT and LOSS vs CASH FLOWS


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Many people may think these 2 things are the same…

They’re not

Are they related? Yes…for sure

But they can also differ

Let’s start with some definitions…

➡️ What is a Profit & Loss?

In my own words, a Profit & Loss tells you about the profitability of your business

And by profitability…I mean multiple levels

For example:

Your REVENUE (what you’re earning)

[-] MINUS your COST OF GOODS SOLDS (IE what it cost you to deliver your revenue)

[=] is your GROSS PROFIT

Then your Gross Profit

[-] MINUS your OPERATING EXPENSES (things like Rent, software etc.)

[=] Gets you your NET OPERATING INCOME

From there, you

[+] add other income [-] or subtract other expenses

[=] and you get your NET INCOME

➡️ What is Cash Flows?

Cash flows is the net change in your cash…

put differently…

Net cash flows = current cash balance - opening cash balance

This gets shown on the Statement of Cash Flows

➡️ How do these 2 reports RELATE to one another?

Well…your cash flows is certainly affected by the profitability of your business

For example…if you are consistently posting a positive net income…

You should expect your cash flows to be growing…

Unless of course, it doesn’t…due to:

➡️ How do these 2 reports DIFFER from one another?

Well, your profit and loss doesn’t care about:

🕔 How quickly you are COLLECTING from your customers

🕕 How quickly you are PAYING your vendors

Similarly, not every activity that takes place hits your profit and loss

Consider a few examples:

1️⃣ You purchase inventory

2️⃣ You raise capital

3️⃣ You purchase a large piece of equipment

All 3 of these wouldn’t show up on your P&L…

They’d show up on your BALANCE SHEET

That's my take on how the Profit and loss differs from Cash flows - to me, they are both important!

Learn more about the Net income VS Cash flows here.



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