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The difference between the PROFIT and LOSS vs CASH FLOWS


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.


The PROFIT and LOSS vs CASH FLOWS

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