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Profit and loss acc vs cash flow statement


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Profit and loss acc vs cash flow statement

  1. 1. P&L statement and Cash
  2. 2. Let us look at the following examples:- 1) A man trying to swim across a flooded river to grab a huge prize promised to him for doing the feat. 2) A person going hungry for 100 days to win a competition. 3) An employer promising his employee 24 times his monthly salary for a job. But the only catch being that the salary would be paid together at the end of the first year. 4) An organization spends a large sum of money in a brand campaign but does not have enough money left to pay the salaries of the employees. 5) A man buying the best car available but running out of money to buy fuel. 6) A person getting admitted into the best university but having money that would only fund half the course. In the all the above examples, we have seen thatsomewhere there dangles an appetizing proposition butthe path that is drawn up to make it to the goal is fraughtwith danger. For example, the man who is crossing
  3. 3. river has little probability to survive till the other end. Ifhe cannot make it, then what is the use of the grandprize?Similarly, the person going hungry for 100 days may notlive to enjoy the fruits of his perseverance. The employerwho promises double salary to the employee takes thethunder away when he places the condition before himthat hell get paid only at the end of the year. How wouldthe employee survive the year without being paid?Likewise, buying a great car but having little left tomaintain and run it becomes a futile and meaninglessact and so also would be the case when a person goesto the best university only to realize that he does nothave enough to fund the entire course. An incompletecourse, quite obviously has little value. There is nological concept like half a doctor or half an engineer orthree fourths a lawyer. You are either a professional oryou are not.The above examples have been explained to help oneunderstand the difference between the Profit and
  4. 4. Statement and Cash Flow statement. While the profitand loss statement gives an indication of the operationalefficiency of a business, it does not entirely reflect thecash flow of the business.For example, if you are a sculpture and you invest 10Kin materials to sculpt statues. You then sell those to aclient for 20K, and make a profit of 10 K. In the P/Lstatement, you would record this 10 K profit even thoughyou havent received the money. Now the client maytake up to an “X” number of days to pay you. This is oneof the main differences between a P/L statement andCash Flow statement. The P/L statement uses accrualaccounting. This is when all revenues are recordedwhen earned, and expenses when incurred.Now, in your sculpting business, the company may geta huge order and spend a lot of money in supplying thegoods on credit, and this as a result would leave thecompany with inadequate amount of money for salaries.So even if the business opportunity is large,organizations should know how to manage their money.They have to understand that paying employees on
  5. 5. and maintenance of machines need to be given priorityover simply chasing orders. This is why the cash flowstatement is a reflection of a companys health, whetherit is able to pay bills on time and its ability to financegrowth. Simply looking at the P/L statement may notgive the kind of insights, However, a P/L statementshows a thorough account of revenues and expensesand is helpful for a person to gauge the earnings pershare and whether to invest in a company or not.In the end, it is important to look at both of thesestatements together to get a better understanding ofhow the business is doing as a whole. Each statementgives vital information, and they work hand in hand. Ifthe net income is low on the P/L statement, theninvariably there is a weak cash flow and one will be ableto see where the cash is being spent on the cash flowstatement. Looking at these statements separately anddrawing conclusions will only leave you will half thepiece of the pie and leave you in situations like the onesmentioned