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Provision Business Services LLC

A Professional Bookkeeping Firm

Located in Albuquerque, Serving all of New Mexico

505-269-3783

Cash flow and profit & loss are two terms that can be confused.  If you end up talking with a banker, you’ll want a clear understanding of both terms.

Let’s start with profit and loss, which is the easier concept.

Income – Expenses = Profit (or Loss).

If your income is greater than your expenses, you have a profit.  If your income is less than your expenses, you have a loss.  Pretty straight forward.

The confusion comes when you have “expenses” that accountants and bankers don’t categorize as “expenses”.  For example, loan or credit card payments.  When you make charges on your credit card, those are expenses.  For example, $25 at Chevron for gas, $50 at Office Max for office supplies, $100 to Verizon for your cell phone.  Each of these is an expense and fits into the “expenses” part of the profit and loss equation above.

What happens when you write a check to the credit card to pay for your charges?  When you write a check for $175 to Capital One to pay your credit card bill, it is NOT an expense.  It doesn’t fit into the profit and loss equation at all.  You are actually paying off a liability.  This affects your cash flow, but not your profit and loss.

All deposits – all withdrawals = Positive (or negative) cash flow

If your deposits are greater than your withdrawals, you have positive cash flow.  If your deposits are less than your withdrawals, you have negative cash flow.

You can be making a profit and have a positive cash flow at the same time, which is kind of intuitive.  You can have a loss and a negative cash flow – also kind of intuitive.  However, what happens if you’re making some profit, but you have too much debt to pay off?  A profit with a negative cash flow.

Let’s say you make $5,000 profit, but between your credit card payments due, not due on cars you are financing, the mortgage due on the office building, payroll taxes due, sales taxes due, and income taxes due, you can have a very negative cash flow.

Before a bank will loan your business money, they will look at both y our profit and loss and at your cash flow.  Having a good understanding of these concepts will make you a better business owner, and a more responsible borrower.