Profit and cash flow are NOT the same thing. You can have a positive cash flow and still not be making a profit. Profit = income – expenses. However, if you keep track of both your profit and loss and your cash flow, you can have a more complete picture of your financial situation.
A cash flow statement is actually a prediction of how much cash you have on hand at a particular time. Your cash flow statement begins with the profit and loss statement which is a report of your operating funds. The profits of your business help your cash flow; while your cash is reduced with losses. All of these figures will help you to plan for your available capital needs; especially if your business is just starting out when it is most likely to have the most expenses and the least income.
As you study your cash flow report, it is important to keep some things in mind:
Depreciation cannot be deducted on a cash flow statement as it can on a profit and loss statement because depreciation is a non-cash item
Your cash flow statement must include the principle payments on your loans, but only the interest portion is deductible from your profit and loss statement.
All sales cannot be counted as “cash” immediately; sales that are made on credit do not appear for 60 – 90 days, and therefore, your cash flow is impacted by credit sales.
Your cash flow statement can be generated after you input or download the following information: Income (your sales minus your direct and operating expenses) and your starting cash for the time period. The cash you have depends on how efficiently you can collect revenue and must include all of your overhead expenses, your loan payments, and your depreciation. The amount of cash you have on hand depends on whether you sell for cash or on credit; and also whether you purchase with cash or on credit.
If your business is still in the start-up phase, it is even more important to have adequate working capital to offset the lag in sales and collections. To help to ease any cash crunch, try to operate on a cash basis as much as possible; and also accumulate as much credit from your vendors as possible. You will need an accurate cash flow statement to plan for the future and to present to your lenders when you apply for a loan. You will want to be in a position to receive as much as you can in one loan as it is much more difficult to return with a second loan request.
Together with your profit and loss statement, your cash flow statement is an important financial management tool for your business.