The difference between the PROFIT and LOSS vs CASH FLOWS
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Many people may think these 2 things are the same…
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
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…
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!
The PROFIT and LOSS vs CASH FLOWS