As a private practice owner, you would have come across the terms Cash Flow Statement and Profit and Loss Statement. If you are not familiar with these terms, they can seem interchangeable, as they both seem to keep track of money coming in and going out.
However, there is a huge difference between the two. Below is a simple explanation of the difference.
Cash Flow Statement
As the term suggests, a cash flow statement shows the flow of cash in and out of your business. Think of it as a financial activity statement that lists all money coming into the business, as well as all money going out of the business in business-related expenses.
Cash flow statements are useful in seeing a realistic picture of your day-to-day, week-to-week, or month-to-month (or any other period) cash balance. It should show every detail of incoming and outgoing cash of the business.
Keeping a well-documented cash flow statement can help you to plan ahead for difficult times. For example, if many of your quarterly or annual bills fall in the same month, you will be able to see that in a cash flow statement and implement a savings plan to manage those outgoing expenses.
Profit and Loss Statement
Again as the name suggests, a profit and loss statement shows the profits and losses made in a business over a specific period. Profit and loss statements are best understood as an income statement that closely shows the performance and value of the business.
As such, profit and loss statements include non-cash accounting items such as depreciation and amortisation. They also show how much your revenue and expenses were, and the resulting profits after taking into consideration all non-cash items as well.
Difference Between Cash Flow and Profit and Loss
An interesting point is that while cash flow statements and profit and loss statements might seem to show similar information, they can look very different for the same business over the same period. For example, a business that seems profitable based on their profit and loss statement could still run the risk of going under based on their cash flow.
A simple way to distinguish between them is that cash flow statements are more concerned with the realistic “now”. It is also more concerned with when the money is coming in/going out, rather than where. Thus, cash flow statements show short-term validity of your practice and its ability to pay bills and vendors.
Profit and loss statements, on the other hand, are not concerned with the when, nor are they concerned with the cash balance of a business at any given moment. Instead, profit and loss statements can be thought of as looking at long-term validity and performance of a business. This is why you will only find relevant business expenses in your profit and loss statement. For example, profit and loss statements would exclude expenses such as credit card payments, owners’ draws and loan payments. Therefore, a profit and loss statement, ignoring such payments and expenses, can show a profitable and healthy business, while the business may be struggling to make ends meet.