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

Like this post? Subscribe to my RSS feed and get loads more!