They both provide different information about a business – this difference may be minimal (especially for small or micro businesses) or quite substantial.
The Profit & Loss Statement or Account is also commonly known under other names such as an Operating Statement or Statement of Financial Performance. It measures the profitability of a business – that is the return on it’s trading or day-to-day operations. This is also known as the revenue side of the business - as opposed to the capital side, which is all about investment, funding and equity.
A Cashflow Statement shows all cash and bank movements belonging to the business. A Bank Statement may serve this purpose, particularly if it contains all the business funds (ie no other accounts, loans, floats or other cash or cash substitutes). However this is usually summarised Cashflow Statement and shown in a format which gives useful information such as by categories, by month rather than a merely a list of receipts and payments. It includes transactions that are either revenue or capital in nature. The Cashflow Statement measures the liquidity of a business and is a key indicator of solvency – that is the ability of the business to meet its debts and liabilities.
For very small businesses, or those with low and negligible timing differences a Cashflow Statement alone may be sufficient. By timing differences I mean the lag or amount of time between issue of invoice and receipt of payment, and between receipt of purchase invoice and payment made. The Australian Tax Office generally only requires small businesses (usually with turnover up to $2m) to report on a cash basis.
Where reporting on a cash basis is neither permitted nor sufficient the accrual basis is used. This then produces the Profit & Loss Statement. The accrual basis means that revenues are matched with associated costs regardless of when they actually arise. A simple illustration is a wholesaler might buy their stock in March but nor sell it until April – both transactions will be reported in April’s Profit and Loss. In accounting terms this matching is done through tools such as inventory management and the recording of accruals or prepayments.
Either Statement on its own will tell a lot about the company but they need to be considered together to get a clearer picture. For example a business that is otherwise profitable may not be good at collecting debts, or is paying its bills ahead of terms, which puts cashflow under considerable strain and may negatively affect solvency. The longer invoices are outstanding the greater the chance of a bad debt occurring – when this happens they will be reflected in the Profit & Loss but this is too late for remedial action.
Generally the more ways you can look at information the more it will help with the management of your business. It is also vital that it is good quality information which makes it so important to have a good system set up from the beginning with good, accurate and timely data recording.
