It is important for all business owners to have a clear understanding of the financial performance of their business. This means getting to grips with the merits of cash flow forecast vs profit and loss and what each metric means for your company.
A failure to appreciate the importance of these metrics could leave your business in a fragile position. Should a company with a poor grasp on its own financial health and performance be struck with an unforeseen issue, the impact on the company going forward is essentially a lottery. Without a clear understanding of your cash flow and profit/loss metrics, you won’t know how an outside factor can affect you.
This blog will discuss cash flow forecast vs profit and loss, what is meant by both metrics, which is more important, discuss why you should be regularly reviewing your finances, and more.
What is Meant by Profit and Loss?
A profit is defined as whatever is left over once the revenue generated from a company’s operation exceeds its expenses (including costs/taxes etc.). Conversely, a loss is when these expenses and operating costs exceed the income generated in a given period of time.
Regardless of if you are operating a car boot sale, an Instagram company, or a global franchise, the primary goal for all businesses should be the same; to come out with a profit.
There are three major types of profit. Each of these different types will paint a slightly different picture of your company’s profits. The different types are:
- Gross profit: Gross profit refers to sales minus the costs of goods
- Operating profit: Occasionally referred to as earnings before interest and taxes (EBIT), operating profits excludes any operating expenses.
- Net profit: Sometimes called the bottom line. Net profit is the amount of money earned once all operating, interest, and tax expenses are deducted.
What is Meant by Cash Flow?
A company’s cash flow refers to the net amount of cash that is regularly being transferred in and out of a company. It is widely believed that the more positive your cash flow the more value and more attractive your business is to any current or prospective shareholders/investors.
Cash flow can be both positive or negative. While a positive cash flow is for when a business generally has more cash moving in than out, a negative cash flow is a huge indicator of a failing business as it means they have more money moving out than they are able to generate.
The Difference Between Profit and Loss and Cash Flow Forecast
The difference between profit and loss and cash flow forecasts comes down to the fact that profits and cash are two distinct things. While profit and loss indicate the amount of money that is left over once expenses have been paid, cash flow forecasts measure the sum net flow of cash both in and out the business.
Generally, cash flow forecasts are on hand to provide you with a more precise overview of your company finances day-to-day, breaking down every single cash flow both in and out of your business in order to provide you with an all-encompassing figure. Profit and loss on the other hand will exclude certain sources of income/outgoings as irrelevant.
Unlike profit and loss, cash flow forecasts are done to predict exactly how much cash is moving in and out of a business. A cash flow forecast will predict how much you are likely to receive per month as well as how much you are expected to spend. This is then used to generate an estimated figure to determine how much you should expect to be left with when all is said and done.
Profit and Loss vs Cash Flow: What’s More Important?
Unfortunately, there is no one simple method of determining the financial health of your operation. When it boils down to it, profit and loss vs cash flow shouldn’t even be a question. Neither is more important than the other. However, when utilised together the two will complement each other and give you a clearer view than if done individually.
There is no simple answer to the question of profit and loss vs cash flow. Both measures are unique and important to determining the success of your business — business owners, directors, managers, and investors alike should all have an understanding, not only of the workings of both metrics, but how they can work in tandem.
For example, it is possible for a company to be operating with a positive cash flow while still operating at a loss. This is in fact fairly common when new startups open their doors. Equally, a business can be operating profitably while still having a negative cash flow. These cash flow issues will cause problems with regards to paying some business expenses, and will stop the company being able to expand — but if you just measured the success of the business in the binary profit/loss metric you may push ahead with such an expansion anyway, potentially putting the firm at risk.
It is imperative that all business owners/directors gain a clear understanding of not only profit/loss and cash flow forecasts, but also the various other metrics that can help you to determine the success or failures of your company.
The Importance of Regular Reviewing
Routinely reviewing your company’s financial performance is incredibly important as it provides a regular snapshot of your financial health. It will allow you to determine the success of your operations current model, as well as provide you with context to make some key decisions, such as expansion, additional investments, and more.
Regular reviews of company finances can also be incredibly important if you want to attract new investment. Prospective investors are always likely to want as up to date data regarding their prospective investments finances as possible. There is little use having financial data from last year if an outside factor has caused the profitability and cash flow of the business to falter in the time since.
Likewise, regular reviewing of your finances can also be helpful in providing an insight into the future: whether your operation as it is currently operating is on track to grow, shrink, or maintain.
How Inquesta Helps with Cash Flow and Profit and Loss
Understanding cash flow and profit and loss is a vital step in securing the financial future of your business. A proactive owner with knowledge of the important metrics that determine the financial health of their company is one that is prepared for any eventuality.
Failing to regularly track your financial health could have a disastrous effect on your company in the short or long-term. With little knowledge of how you are really doing when you dig down into the numbers, you have zero assurances that you can survive should something impact youroperation.
Inquesta has assisted businesses in all manner of different sectors, including supporting them against any potential financial issues that could be on the horizon.
Our experts can carry out an in-depth review of your company’s cash flow and suggest ways of improvement should we spot signs of any problems. The experience and knowledge of our specialist team means that they are able to advise you on business recovery options or guide you through the liquidation and insolvency process should the situation veer towards the worst case scenario.
For further information on how Inquesta can assist you with your company cash flow and profit and loss don’t hesitate to get in touch with a member of our team today or book a free consultation.
