1. P&L statement and Cash Flow
statement
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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 that
somewhere there dangles an appetizing proposition but
the path that is drawn up to make it to the goal is fraught
with danger. For example, the man who is crossing the
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3. river has little probability to survive till the other end. If
he cannot make it, then what is the use of the grand
prize?
Similarly, the person going hungry for 100 days may not
live to enjoy the fruits of his perseverance. The employer
who promises double salary to the employee takes the
thunder away when he places the condition before him
that he'll get paid only at the end of the year. How would
the employee survive the year without being paid?
Likewise, buying a great car but having little left to
maintain and run it becomes a futile and meaningless
act and so also would be the case when a person goes
to the best university only to realize that he does not
have enough to fund the entire course. An incomplete
course, quite obviously has little value. There is no
logical concept like half a doctor or half an engineer or
three fourths a lawyer. You are either a professional or
you are not.
The above examples have been explained to help one
understand the difference between the Profit and Loss
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4. Statement and Cash Flow statement. While the profit
and loss statement gives an indication of the operational
efficiency of a business, it does not entirely reflect the
cash flow of the business.
For example, if you are a sculpture and you invest 10K
in materials to sculpt statues. You then sell those to a
client for 20K, and make a profit of 10 K. In the P/L
statement, you would record this 10 K profit even though
you haven't received the money. Now the client may
take up to an “X” number of days to pay you. This is one
of the main differences between a P/L statement and
Cash Flow statement. The P/L statement uses accrual
accounting. This is when all revenues are recorded
when earned, and expenses when incurred.
Now, in your sculpting business, the company may get
a huge order and spend a lot of money in supplying the
goods on credit, and this as a result would leave the
company 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 time
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5. and maintenance of machines need to be given priority
over simply chasing orders. This is why the cash flow
statement is a reflection of a company's health, whether
it is able to pay bills on time and its ability to finance
growth. Simply looking at the P/L statement may not
give the kind of insights, However, a P/L statement
shows a thorough account of revenues and expenses
and is helpful for a person to gauge the earnings per
share and whether to invest in a company or not.
In the end, it is important to look at both of these
statements together to get a better understanding of
how the business is doing as a whole. Each statement
gives vital information, and they work hand in hand. If
the net income is low on the P/L statement, then
invariably there is a weak cash flow and one will be able
to see where the cash is being spent on the cash flow
statement. Looking at these statements separately and
drawing conclusions will only leave you will half the
piece of the pie and leave you in situations like the ones
mentioned above.
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