Know the difference between cashflow and profit and loss

Do you know the difference?

A business associate friend posed this question to me after she had downloaded my cashflow spreadsheet (click here to download) and was comparing it to her monthly accounts, which to her seemed a duplication of work.

The purpose of a cashflow forecast is to forecast your flow of cash. I’m not trying to be funny here, but that is exactly what it does!

Put another way it forecasts all of the incomings and outgoings of your business. Or you could use it the way I do, which is to forecast the flow of income and expenditure in total for our household. This enables me to make goals and then see if our forecasted income and expenditure will meet those goals. So, I use it as both a budgeting and a planning tool.

In contrast, a profit and loss account, will just monitor the taxable income less the allowable expenditure of your business and is the actual results of your business over a set period. This could be annually for tax return purposes or more frequently, for example monthly, if you want to monitor your business results on an ongoing basis.  It is important to remember that your cashflow forecast will include every amount of incoming and outgoing cash whereas your profit and loss account will only include the income and allowable expenditure of your business not, for example, monies that you have put into or taken out of your business for your own use.

So the cashflow forecast is a prediction and the profit and loss account is the actual trading figures.

It is useful to have both, as the forecast serves as a budget prediction which you can then compare with your actual results and see where any deviations from your budget occurred.  If the deviations are favourable, how can you repeat them and if they are undesirable what you can reasonably do to prevent them happening in the future? It also enables you to see where you have room in your budget for business building expenses, such as marketing.

Let me know if you have any questions on this or anything else to do with your accounts in the comments below:

Also make sure you get my free e-book “Accounts Without Fear: 3 Simple Steps To Organising Your Accounts Now” by clicking Here

Accounting-For-Small-Business-SuccessFirst, what is cash basis?
It is the recording of your income and expenditure as you receive it or pay it out.  Therefore, on this basis, your financial accounts would not include any invoices you have issued for which you have not been paid (debtors) or any invoices you have received for which you have not made payment (creditors).

This is as opposed to what is known as accrual based accounting which is where your financial accounts reflect the invoices you have actually issued and received regardless of whether you have received payment for your invoices or paid the invoices you have received, at your financial year end date.  Accrual based accounting is what you should have been doing prior to 2013/14.

Why is this relevant to me?
If you are a sole trader, then from the current tax year, 2013/14, under the provisions of the Finance Bill 2013, you can use cash accounting, provided your income is less than £79,000 (this is the threshold when you have to register for VAT) The aim being to simplyfy accounting and tax for small businesses. The reality is that this may not be too different from what you had been doing previously.

Do you take goods from your business for your own use?
The businesses that immediately come to mind are Networking Marketing/MLM, where the distributors are advocates of the products and therefore consume them as part of their business.  Prior to cash basis accounting this should have been added to income at market value, under the new rules this adjustment can be made at cost price.

small business bookkeeping questions


This question was posed to me recently by one of the students on my video bookkeeping course. I figured that if she has that question then its likely that so have other business owners.


First let’s look at the reasons for doing accounts:
Primarily it is to record all of your business transactions, so that:

  • You know whether your business is profitable or not
  • You know how much tax you will have to pay
  • You can accurately complete your VAT returns
  • You can accurately complete your tax returns

Which of these is the most important to you will determine how much time you devote to doing your accounts and how regularly you do them.  (Obviously having to do quarterly VAT returns does mean a commitment of once a quarter at a minimum)

If you are a one person (sole trader) service business you will probably have few transactions on a monthly basis and you probably have a pretty good idea of what your income is and also your profits if expenses are staying consistent too.

So on that basis, you could decide that you will complete your accounts quarterly or even annually.  If you don’t find the process of actually doing your accounts too tedious then annually could suit you fine, but having done it monthly for say half an hour a month makes the whole process far less cumbersome than spending a whole day once a year doing it.  So you can see it is a matter for your personal preference.

A product based business that sells hundreds of products per month which has the associated costs of buying in or manufacturing the product, staff costs, premises costs etc at a minimum should be keeping monthly accounts otherwise it is easy to lose control of things as suppliers go unpaid, turnover (sales) are not being monitored to see if there is a need for VAT registration and most important of all, cashflow is not being monitored, which is the death knell for any business.

If you want to increase your business profits over a set period of time, because you have financial goals you want to achieve, then keeping on top of your accounts is of utmost importance because without them there is no way of accurately telling whether you are meeting your goals.  For a product based business I would also be looking at monitoring the profitability of individual products or areas of the business to make sure that selling that product/service continues to be financially viable.

I discussed this in my article about goal setting at the beginning of the year – I talked about setting financial goals and then monitoring the actual results against the forecast to see if you are on track and the only way to do this is if you are keeping on top of your bookkeeping

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