Why profit and cash flow differ

Revenue, cash receipts and a bank balance answer different questions. Keep timing and classification consistent when using financial templates.

An invoice can precede its cash receipt

Suppose a service business earns $1,000 on an invoice in December and collects it in January. Under an accrual basis, December may show $1,000 revenue and a $1,000 receivable. The December bank balance has not increased because of that invoice. January collection increases cash and reduces the receivable without earning the same revenue a second time.

The standalone P&L asks for revenue on your chosen consistent basis. The direct cash-flow template asks when money arrives. In the linked forecast, a receivables balance connects revenue and collections through its change from one month to the next. Its share assumption is a simplified forecast convention, not a transaction ledger.

Borrowing is not sales

A $5,000 loan receipt increases cash and the debt balance. It does not generate $5,000 of service revenue. A $500 principal repayment reduces cash and debt. Interest is a separate financing cost. Combining principal and interest into one expense would distort both profit and the remaining debt.

The direct cash-flow file puts borrowing and principal in financing rows, with interest in operating payments under this template's convention. The linked model calculates monthly interest on opening debt and separately limits principal repayment to available debt.

Equipment is not the same as depreciation

Buying equipment for $1,200 can consume $1,200 cash when paid. Under an appropriate capitalisation policy, the P&L may instead recognise depreciation over its use. The example model therefore separates capex cash from entered depreciation and tracks net fixed assets.

The simplified projection does not determine whether a purchase must be capitalised, calculate statutory depreciation or handle asset disposals. Choose accounting policies appropriate to your business rather than assuming the spreadsheet's convention resolves them.

Reconcile, then forecast

Use a P&L to inspect earnings, a balance sheet to inspect position and a cash forecast to inspect timing. Trace differences using receivables, payables, non-cash costs, capex, debt and owner transactions. A profitable year can still contain a cash shortage before customers pay.

Download the cash-flow template · Inspect the connected forecast

Definitions and further reading

The SEC introductory guide to financial statements explains why position, earnings and cash describe different financial information. The SBA business-management resources provide broader small-business context. These sources support the definitions; the original workbook layouts and invented examples are AllMarkets material.