What is the difference between cashflow and profit and loss?
Cash flow is the easier of the two to understand. It is the difference between inflows (actual incoming cash) and outflows (actual outgoing cash). It includes all form of cash into and out of the business including loans, drawings, asset purchases and tax payments.
Cash flow forecasting gives you a way to see ahead. It helps determine the months in which you might be short of cash, and allows you to plan ahead for those shortfalls.
Profit/loss is the calculation of how much money you have made or lost. However, you may not have received or paid out all money due or owed yet. Profit and loss includes income that you have billed but not yet been paid for and also expenses that you have been invoiced for but not paid for yet.
Cash flow is different from accounting profit, and you need to be careful in a profitable, growing and developing business as you can easily run out of cash and go ‘belly up’. The reason why people are incorrect in assuming that profit should be the sole focus is that profit does not account for asset purchases or increases in working capital demands (such as rising stock and debtor balances). It also does not account for the timing issue of when you might receive income.
The IRD uses net profit/loss to calculate your income tax liability.
Author: Brendan Waters
