Your profit & loss report could show a nice healthy profit, but your cash flow could still be taking a hitīecause your P&L accounts for all invoices generated (whether or not you’ve been paid) it could show a nice healthy profit. As long as your profits are going up over time, you’re heading in the right direction. The profit figure on the bottom line of your P&L report represents pre-tax income remaining. The report gives you the totals of all revenue within your accounting year versus the total amount spent to generate the revenue.
Your profit and loss report is a great tool for understanding how viable your business is, going forward. Profit is your pre-tax earnings after expenses are taken into account
Having an understanding of your actual cash movement and being able to spot cash gaps can help you manage your money and make plans. This is because a profitable business doesn’t not automatically mean good cash flow. The bookkeeping is up to date, the sales and profit figures look great but the bank balance doesn’t look good. It’s not unusual for business owners to use their Profit and Loss account (P&L) and Balance Sheet to gauge business performance, however looking at actual cash movement rather than just your profit figures and balance sheet can tell a very different story. Knowing how your business is performing is vital to making financial decisions and being empowered to explore new opportunities.