The 'P&L Report' vs. the 'Balance Sheet' vs. the 'Cash Flow Statement'.
The Profit & Loss Report
As a business matures from a startup to a $1M business, a Profit & Loss statement is probably the most important resource for keeping track of the financial position of the company. The P&L is fairly simple. It summarizes revenue, costs, and incurred expenses during a specific time period.
The Balance Sheet
Once a business hits the $1M mark, a balance sheet becomes extremely important. It’s around that point that business owners are often approaching banks to get a line of credit or a note to buy some equipment. The business is proving successful and you want to expand upon that success with some additional resources.
The bank is going to want to get a full picture of the health of the company and that’s where the balance sheet comes in. While a P&L statement shows the profit and loss over a period of time (a month, a quarter, a year, etc.), the balance sheet summarizes the company’s financial position at that specific point in time. It shows where the company stands today.
The balance sheet presents the overall picture of the cash you have in your bank account(s), fixed assets, accounts receivable (what people owe you), inventory, etc. It’s going to show liabilities such as accounts payable (what you owe people), line of credit balance and any debt balances. It’s not a running total of the transactions within the account, it’s the balance of those transactions at a specific time. With fixed assets, the balance sheet looks at the cost of the asset when you first purchased it less how much it has depreciated over time since the asset is worth less in the eyes of the IRS over time.
A good software program is essential at this point as the details become much more complex once your business hits that $1M mark. You’ll want to generate the balance sheet and maintain it on a regular basis so it’s up-to-date whenever you need it.
The Cash Flow Statement
What a cash flow statement does is it tells you how much cash you’ve spent—your inflows and outflows—over a period of time. It’s similar to the P&L but it takes everything into account—i.e., loan payments, distributions, capital investments, anything that’s going to be coming in and out of the cash accounts.
Cash flow statements are very tricky to prepare. I don’t recommend that business owners try to figure this out on their own; however, if you were to generate this yourself, here’s how this works:
You take the beginning cash plus or minus your profit and loss plus or minus the change on your balance sheet items. That gives you the amount of your operating (day-to-day) expenses. You may also be investing money back into the company or taking financing loans from the business. Either of these types of activities would need to be factored in as well. The final amount is your ending cash.
These numbers are essential for the financial health of your company. If you want to grow your business, you need to have a handle on your cash flow. I recommend looking at this even in the early startup stage, but again, I don’t recommend preparing this internally. You’re better off not doing it at all if you don’t have an expert you can rely on who fully understands how to prepare this for you. When it’s done right, you can predict the future of your company and minor errors in the computation can have a huge impact on the end result.
The next step in the cash flow analysis is to look at the cash flow projection:
You can create a table like this in Excel or Google Sheets. Put all of your columns together and extend it all the way to the end of the year. You start with your beginning cash, what the balance is today. Then you have all your cash inflows which means any money coming into the company—money you’re collecting on invoices, refunds from vendors, etc. Next comes your cash outflows which is simply any money going out of the company—loan payments, distributions, taxes, etc. Finally, you’ll want to set up the formula which is pretty straightforward—beginning cash plus inflow minus outflows equals ending cash. You can carry that formula through the end of the table.
Having a cash flow projection can be a game changer for businesses. It enables you to see where cash might get short down the road, it helps with decisions like when to hire a new employee, and it allows you to see when you need to increase your pipeline.
All three of these reports are essential for business owners at some point during the growth of the business. If you’ve ever been worried about being able to make payroll or wondered whether or not you had enough money to pay your upcoming taxes or hire a new employee or if you just don’t feel 100% confident when it comes to understanding the financial side of your business, consider seeking out a Virtual CFO who can help with preparing these reports and discussing these types of strategic efforts. This can make a world of difference for founders and company owners as you enter that next stage of business growth.
About Summit CPA
Summit CPA is a distributed accounting firm with a non-traditional approach to accounting. We have an amazing team of CPAs and accountants who provide professional Virtual CFO Services and 401(k) Audits for companies all over the United States—many of which are remote companies as well. We also recently launched a CPA Firm Augmentation service, coaching other CPA Firms on how to successfully provide Virtual CFO services. We fully understand the accounting, bookkeeping, cash flow management, and business tax nuances that come with being distributed, and we love helping our clients overcome these challenges through our own experience and expertise.
Originally published May 22, 2019, updated Oct, 11 2019