It is imperative to determine the timing of income and expenses. A profit is generated only when the income exceeds the expenses of the organisation. It doesn’t mean that a profitable business got sufficient cash flow to sustain in the long run. To bring a respectable idea of the cashflow comparing it with the profit earned is a bit narrow since it is confined purely to a particular time period. On contrasting it with the cash flow statement which is highly dynamic and depicts the movement of cash in and out of the business is dilemmatic. As per the accounting conventions, accrual accounting method is followed. Availing accrual based accounting services in Dubai helps to recognise the effects of every transaction in the profit and loss statement. It cuts a solid figure on where the business stands but a harder picture on the cash position. During this phase you need the help of cash flows which include three types of business activities they are:
- Operating Activities: It includes entities primary revenue creating activities such as cash receipts and cash payments. as indirect method of accrual-based accounting is followed it consists of net income amount then converted to cash from operating activities by summing, changes in accounts receivable, inventory, accounts payable, and most other current assets and current liabilities.
- Investing Activities: Comprise of cash inflows and cash outflows arising out of the disposal or acquisition of the company’s long-term assets. During disposal companies’ cash and cash equivalents are used.
- Financing Activities: Cash Flow from Financing Activities is the net amount of money a company generates within a period of time and is used to finance its business. Finance activities comprises the issuance and repayment of equity shares, dividend payment, issuance and repayment of debt, and capital leasing. Companies usually raise the capital by issuing debt or equity, and it will be shown in the cash flow statement.
Profit and loss statement Vs cash flow statement
Profit and loss statements are prepared to ascertain the net profit of the operations whereas cash flow statements measure the cash generation capacity of the business in the given span of time. While preparing P&L statements nominal accounts are considered and a double entry system of accounting is mandatorily followed here. But cash flow statements follow cash-based accounting and ignore the double entry system. They rely on the activities to be measured on the functioning of the business. In short the key difference between cash flow and profit is matter of time because P&L cannot show the whole picture of day to day understandings but cash flows provide that. The formulation of income statement and cash flow statement is inevitably mandatory for organisations. These statements allow us to understand the company’s performance, stability and solvency position. These statements are also used for the internal and tax audit of the business. Better timing and better line of credit helps in running smooth business functions. Even though both the statements provide financial overview, the picture of the company is incomplete without understanding both.
Cash flow Report or Profit and Loss Report – which is more useful for Business Owners / SME companies
As the saying “life blood”, cash flows denote it for all business. You know why? It acts as a wave for the smooth running of business ocean. A cash flow report can help you to make critical management decisions for your business before it runs out of cash. It will help you to determine the areas to focus your business efforts to generate cash. As cash flows depicts the flow of money in and out of business, profit just portrays the success of business. For small business owners cash flow reports are more significant because it keeps business running. But for large enterprises they target for high profit which creates a public image and generates huge earnings. For any successful business profits and positive cash flows are the major step stones for the long run. Lack of profit eventually has a negative effect on the cash flow. In this situation, profit is more important. Another thing to remember on choosing between cash flow or profit is cash flow can be bought through pledging the personal assets for loan. To decide which statement is more useful to business totally depends on the circumstances and industry type. A business could watch profit every month, but its money is tied to fixed assets or accounts receivable, and hardly paid to employees. Once a debt is paid there will be some influx in revenue.
Importance of Cash Flow Management
Cash flow statements provide insight into the cash position of the company. It helps the company to take decisions on investments and debt partners. It should not be overlooked as a financial statement for comparison because it’s the cash summary of how well a cash is spent and earned. Cash flow management helps to:
- Maintains a track on the debts of the company.
- Monitors and prevents the expenses incurred in the regular functioning.
- Provide a detailed summary on how well your money is spent.
- Create excess cash for further investment options.
- Take informed smart decisions on the financial aspects.
- Provides Key Performance Indicators (KPI) which can be measured for the success of business.
Importance of Profit & Loss Statement.
Income statements find the financial health and financial progress of the company. It denotes the expenses and income occurred during a particular period of time. It is mandatory that every company should prepare the income statements for the financial analysis. It depicts how well the company is performing and reviews sales aspects. Profit & loss statements helps to:
- The bottom line or net profit measures the financial health and business performance.
- Act as a basic tool for business forecasting and budgeting.
- Helps to control indirect expense and recurring ones.
- Measure the ratio analysis and understand the performance of the organisation.
- Helps in decision making and for improved investments.
WHY CDA FOR YOUR COMPANY?
CDA is one of the leading service consultancy firms in Dubai and all over the UAE. Our experienced professionals can help you out preparing with these financial statements and suggest possible ways to improve and gear up. CDA Accounting & Bookkeeping Services handle CFO Services, Auditing Services, Accounting & Bookkeeping Services, Accounting Software services, Due Diligence Services, and Tax Filing & VAT Consultancy services to the business world according to the convenience of our good clients. Our customer-centric approach is well appreciated, and we promise the best service to your business.
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