On this page
- Why do you need three different statements?
- Cash flow, P&L and balance sheet compared
- One worked example: a new studio’s first month
- What each statement shows (EUR thousand)
- Why is profit not the same as cash in the bank?
- How do the three statements connect?
- Questions for a monthly review of the three statements
- How Financist implements this
- Frequently asked questions
Why do you need three different statements?
Each statement answers its own question, and none replaces the others.
- Cash flow statement: is there enough cash? It records actual receipts and payments, so it matters for liquidity and payments.
- Profit and loss (income statement): is the business earning money? It matches income and expenses of a period regardless of payment date, so it matters for pricing, margin and profitability.
- Balance sheet: what is the financial structure? On a given date it lists assets (cash, customer debts, inventory, equipment), liabilities and equity.
Running a business from one statement alone is risky. On the P&L you can be profitable and unable to pay salaries; on the cash flow statement you can look fine thanks to a loan and miss the losses.
Cash flow, P&L and balance sheet compared
| Criterion | Cash flow statement | P&L | Balance sheet |
|---|---|---|---|
| Main question | Where did cash come from and go? | Does the business earn money? | What do we own and owe? |
| What it shows | Receipts and payments | Income and expenses | Assets, liabilities, equity |
| Timing basis | When money moves | When income or cost arises | Position at a date |
| Time dimension | Over a period | Over a period | At a point in time |
| Key result | Net cash flow and closing cash | Net profit | Equity |
| Used for | Liquidity, payments | Margin, pricing, profitability | Resilience, debt, structure |
One worked example: a new studio’s first month
A studio starts the month with 50 (EUR thousand) of owner’s money in the bank. Five things happen. The numbers are invented for illustration.
- Services worth 100 are delivered; customers have paid only 70, so 30 is still owed.
- Salaries of 40 and rent of 10 are paid.
- Materials worth 20 are received and used, but not yet paid to the supplier.
- Equipment is bought for 30 in cash.
- Depreciation of the equipment for the month is 2.
What each statement shows (EUR thousand)
| Statement | Line | Amount |
|---|---|---|
| P&L | Revenue | 100 |
| P&L | Expenses: salaries 40 + materials 20 + rent 10 + depreciation 2 | −72 |
| P&L | Net profit | 28 |
| Cash flow | Receipts from customers | +70 |
| Cash flow | Payments: salaries 40 + rent 10 | −50 |
| Cash flow | Equipment purchase | −30 |
| Cash flow | Net change in cash (50 → 40) | −10 |
| Balance sheet | Assets: cash 40 + receivables 30 + equipment 28 | 98 |
| Balance sheet | Liabilities: accounts payable | 20 |
| Balance sheet | Equity: 50 + profit 28 | 78 |
Why is profit not the same as cash in the bank?
The studio earned 28, yet cash fell by 10. Four things explain the gap: customers have not yet paid 30, we owe the supplier 20, equipment worth 30 was bought at once, while the P&L takes only 2 of depreciation.
From profit to operating cash flow: 28 + 2 (depreciation) − 30 (increase in receivables) + 20 (increase in payables) = 20. Then −30 for equipment gives −10 for the month.
Balance sheet check: assets 98 = liabilities 20 + equity 78. This equality must always hold.
Typical causes of a gap between profit and cash: unpaid customer invoices, supplier credit, stocking up on inventory, equipment purchases, loans and repayments, owner withdrawals, prepayments and taxes paid later.
How do the three statements connect?
The statements do not compete; they stitch into one system.
- Closing cash in the cash flow statement equals the cash line on the balance sheet at the same date.
- Net profit from the P&L increases equity (retained earnings) on the balance sheet.
- Growth in receivables raises assets on the balance sheet and lowers cash flow compared with profit.
- Buying equipment turns cash into an asset: a payment in the cash flow statement, but only gradual depreciation in the P&L.
When the numbers do not tie, the cause is usually an unrecorded transfer between accounts, a wrong transaction date or a missed debt.
Questions for a monthly review of the three statements
- Is there a net profit for the month, and does it match the plan?
- Is there enough cash for upcoming salaries and mandatory payments?
- Are customer debts growing faster than revenue?
- Are supplier debts piling up beyond the usual terms?
- Does closing cash agree with bank statements and the cash box?
- Does the balance sheet balance: assets equal liabilities plus equity?
- Which large one-off payments (equipment, loan, owner withdrawals) changed cash flow but not profit?
How Financist implements this
In Financist all three statements are built from the same transactions, so there is no discrepancy caused by separate data sources. The P&L can be viewed on an accrual basis (by accrual month, which may differ from the payment date) or on a cash basis. The cash flow statement shows actual payments and, if needed, the plan. The balance sheet is calculated for a chosen date: cash by account, receivables and payables, inventory and fixed assets, with equity as the balancing figure between assets and liabilities. A separate report shows debts by counterparty with ageing. More on the cash flow report, the P&L and the balance sheet.
Frequently asked questions
Which statement matters most for a small business owner?
There is no single main statement. For weekly decisions the cash flow statement with a forecast matters most, because it shows whether cash will last. For pricing, product mix and costs, the P&L. The balance sheet is useful monthly or quarterly to assess debt and structure. They work best together.
Can a company be profitable and still run out of cash?
Yes. If customers pay late while salaries, rent and suppliers must be paid earlier, profit exists only on paper. Cash can also be tied up in equipment or inventory. This shortfall is called a cash gap, and it is visible in the cash flow statement and a payment calendar.
Why must a balance sheet always balance?
Every transaction affects at least two items: if an asset grows, either another asset falls or liabilities or equity grow. So total assets always equal liabilities plus equity. A mismatch means a bookkeeping error, not a feature of the business.
What are accrual and cash accounting?
Under accrual accounting, income and expenses are recorded in the period they belong to, regardless of when they are paid. Under cash accounting they are recorded on the day money is received or paid. The P&L is normally prepared on an accrual basis; the cash flow statement is cash-based by nature.
Where should I start if my records are in spreadsheets?
Start with cash flow: gather all payments by account and sort them into categories. Then add accrual dates and unpaid invoices, and the same data can produce the P&L and the balance sheet. The key is a single source of data instead of a separate file for each statement.