\u201cThe year ended with a profit, but there\u2019s no money in the account.\u201d We hear this from business owners often. Both numbers can be correct, because profit and money are not the same thing. The income statement shows whether the company earned money; cash flow shows whether it has anything to pay with.<\/p>
In our survey only 28% of business owners could say for sure how many months the company could keep going without new sales<\/strong>, and 30% would not know where to find the money if an unexpected cost came up (read the survey summary<\/a>).<\/p> A sale is recognised as income when the invoice is issued. If the payment term is 30 or 60 days, the profit is in the report but the money is still on its way. The faster sales grow, the more money is held by clients.<\/p> Purchased goods and materials only become an expense once they are sold or used. Until then, the money is tied up in inventory and you do not see it in the income statement.<\/p> Only loan interest appears as an expense in the income statement. Repaying the principal reduces cash but not profit, so a month with a big loan payment can be profitable and still negative in cash terms.<\/p> When you buy equipment or a car, you often pay the full amount at once, but only part of it reaches the income statement each year as depreciation.<\/p> VAT is neither income nor an expense for the company, but it passes through the bank account. If that money is spent before the tax payment date, paying the tax comes as a surprise. The same applies to prepayments made to suppliers.<\/p> Dividends and other payments to the owner don\u2019t reduce profit, but they do reduce cash. If they are made without looking at cash flow, a profitable company may end up paying its bills late.<\/p> Let\u2019s say a company sells 60,000 euros\u2019 worth in a quarter and its costs are 50,000 euros. The profit is 10,000 euros. At the same time, customers still owe 20,000 euros, 8,000 euros of new stock was bought for the warehouse and loan principal repayments were 3,000 euros. The income statement shows a profit of 10,000 euros, yet at the end of the quarter there is actually 21,000 euros less in the bank than at the start of the quarter. (The example is illustrative.)<\/em><\/p> Seeing your cash flow starts with bank transactions being recorded correctly and on time. Uuno Puus values an approach where the automatic features of the accounting software are used to the full, above all the import of entries. That way, bank transactions reach the accounts quickly and correctly.<\/p> I like your approach that it makes sense to use the automatic posting features built into accounting systems (I mean above all the import of entries).<\/p>Uuno Puus, member of the management board, Puus Investments O\u00dc<\/cite><\/blockquote> For Marcus Paju, it has been important that his questions always get an answer and that through our cooperation he has learned to better understand how to manage the company and account for costs.<\/p> I have gained so much good knowledge and skills for managing my company better and for accounting for costs.<\/p>Marcus Paju, member of the management board, O\u00dc LasoN Entertainment<\/cite><\/blockquote> Monthly financial controlling<\/a> puts profit, cash flow and key metrics on one page. To get bank transactions into the accounts automatically, use our software and integrations<\/a>service. If you want to learn to read financial statements yourself, take a look at the KL Financial Academy<\/a>.<\/p> The cash flow statement shows where the money came from and where it went. It has three parts:<\/p> If operating cash flow is constantly negative while the income statement shows a profit, it is a clear sign that money is tied up in client debts, inventory or prepayments.<\/p>Why profit and money go separate ways<\/h2>
The client hasn\u2019t paid yet<\/h3>
The money is in the warehouse<\/h3>
Loan principal is not an expense<\/h3>
An investment is spread over several years<\/h3>
VAT and prepayments<\/h3>
Payments to the owner<\/h3>
A simple example<\/h2>
Two stories from our clients<\/h2>
Puus Investments: bank transactions recorded correctly and automatically<\/h3>
LasoN Entertainment: knowledge that stays in the company<\/h3>
How to see profit and money at the same time<\/h2>
The three parts of the cash flow statement<\/h2>
Month-end checklist<\/h2>