From what I’ve seen, most small business owners are quite familiar with the profit & loss statement and the balance sheet. What doesn’t get as much attention is the cash flow statement.

Because not every cash transaction appears on the P&L, and not every P&L transaction involves cash, there will almost always be some degree of difference between what the P&L says is net profit and how much change in cash has truly occurred. The cash flow statement reconciles this difference.

To describe it broadly, the statement begins with net profit per the P&L at the top, followed by adjustments which account for the exclusions of cash from the P&L and the inclusion of non-cash items in the P&L. For example, say your net profit was $10,000 for the past month, but you also increased your inventory by a net of $1,000 and had a net $2,000 increase in accounts payable.

Inventory purchases don’t show up in the P&L until they’re sold (when they become Cost of Goods Sold), which means that you spent cash that is not yet reflected in net profit. Additionally, the vendor bills you received were recognized as expenses, but not yet paid, so no cash has been disbursed yet. As such, your cash flow statement would look like this:

Net profit: $10,000

Inventory: ($1,000)

Accounts payable: $2,000

Net cash movement: $11,000

We’re taking $1,000 away from net profit to account for the disbursed cash that hasn’t shown up in the P&L yet; but we’re also adding $2,000 back to net profit to account for the vendor bills that haven’t been paid.

This is a very simple example, and a business with any complexity will have a more comprehensive cash flow statement, but I hope this has been illustrative. You can see an example of a cash flow statement in the reports section of your Quickbooks file.

If you’d like to learn more about the cash flow statement, please reach out to me!