This is an area that concerns every small business owner. Most business owners struggle to differentiate between profitability in their business (or lack of it) and the way cashflow works. The most common assumption is that if a company makes a profit, that amount should be sitting in their bank account. Well, that is far from reality of the relationship between profitability and cashflow. There are many differences between the way a Profit and Loss report represents its results and the way a Cashflow Statement represents its figures. Some differences are explained here:
PROFIT AND LOSS STATEMENT
Figures may be on an Accrual Basis (entries based on revenue earned and expenditures incurred) or on a Cash Basis (entries based on when money was received and paid). Both set of results will produce different results.
Lease payments are only represented by their interest components and depreciation.
Depreciation for all assets is included.
Figures Exclude GST.
Wages are the Gross Wages (include PAYG tax of the employees).
Journals can be processed for Bad and Doubtful Debts.
Has Opening and Closing Bank Balances.
Effectively reconciles the business' bank account on a monthly basis.
Figures include GST.
Entire lease payment is included.
Business Acitvity Statements (BAS) are paid on a monthly or quarterly basis.
Credit Cards are recorded based on the actual amount paid off and not what has been spent on them.
Net Wages are recorded.
So, as you can see, it's virtually impossible to have the profit in your P&L exactly in your bank account especially when you compound the issue with the way the financial years overlap and that the issues of a previous year, such as overdue debts, can have a massive impact on this year's cashflow balances.
If any of this is of importance to you and you need assistance with managing cashflows and understanding your financial reports, please don't hesitate to call me. This is a significant part of my work with my clients as it is imperative that each and every business owner is ttotally on top of working towards good profit, understand it and how it has an impact on their cashflow.