Profit & Loss Vs Cash

One of the most common questions Not-for-Profit (NFP) managers ask is: Why doesn’t my profit and loss (P&L) statement match my cash balance? This article examines P&L and cash, following up on our previous article on cash vs. accrual accounting.

A profit & loss (P&L) statement—also called an income statement—is designed to show your business’s financial performance over a given period. It records revenue when earned and expenses when incurred, regardless of when the cash moves. It aims to tell you if you’ve made a gain or a loss from your activities.

However, just because a P&L statement shows a profit doesn’t mean you have that amount in your bank account. Why? Because it includes non-cash items and transactions that haven’t yet affected your cash position.

Cash flow refers to the actual movement of money in and out of your organisation. It tracks when cash is received and when expenses are paid, which differs from when they are recorded in the P&L under accrual accounting.

For not for profit organisations that use cash accounting, their P&L and cash balance may align more closely because transactions are only recorded when money is received or spent. However, these figures can look very different if accrual accounting is used.

There are many reasons why P&L and cash flow don’t match. The most common is the timing of income and expense. For example, your NFP might have invoiced a client for $20,000 in December, so it appears as income on your P&L. But if the client doesn’t pay until February, you won’t see that cash in your bank account yet. Likewise, you might have received a bill for office rent in December, but if you don’t pay it until January, your P&L will reflect the expense before the cash leaves your account.

Another reason is accounts receivable and accounts payable. Accounts receivable represents money owed to you on credit. The P&L statement will show this as income, but it won’t show up in cash flow unless you’ve collected it. Accounts payable refers to money you owe to suppliers. Even if your P&L reflects an expense, your cash flow may still look positive if you haven’t paid it yet.

Other factors to consider are depreciation and leave provisions. These provisions reduce profits on paper but don’t always involve any cash leaving the organisation in the same period. Your P&L could show a loss, even if your cash balance is healthy.

Loan repayments and financing activities (such as taking out a loan or paying off debt) impact cash flow but don’t appear on the P&L as operational expenses. If your NFP repays a loan, the cash will leave your bank account, but it won’t be recorded as an expense on your P&L.

Inventory purchases and capital expenditures affect the P&L and cash but don’t always match. Your cash balance drops immediately if you purchase a large inventory or invest in new equipment. However, on your P&L, these purchases might be recorded gradually through depreciation or cost of goods sold (COGS), causing a mismatch.

Imagine a charity receiving a $50,000 government grant in December to cover operating expenses for the next six months. Under accrual accounting, that income might be recognised evenly across six months, meaning only $8,333 appears in each month’s P&L. However, the entire $50,000 is already in the charity’s bank account, causing a difference between reported profit and cash flow.

On the other hand, if the organisation needs to pay annual insurance premiums upfront in January ($12,000), the entire amount will leave their bank account immediately. Still, on the P&L, it might be recorded as an expense spread over 12 months. This means that despite seeing a large cash outflow, the P&L won’t reflect the full cost at once.

Another example may be a community health clinic that operates on government funding and donations. The clinic provides free medical care to underprivileged individuals and relies on a mix of grants, donations, and Medicare reimbursements to cover its costs.

In January, the clinic received a $200,000 government grant to fund operations for the next 12 months. Under accrual accounting, only $16,667 ($200,000 ÷ 12 months) appears as revenue in the P&L each month.

The clinic also provides medical services and expects $50,000 in Medicare reimbursements for January. Even though the P&L reflects this as income, the funds may not be received until March, creating a timing difference.
On the expense side, the clinic incurs monthly staff wages, rent, and medical supply costs. However, some expenses, like a $30,000 equipment purchase, may be capitalised and not fully reflected in the P&L immediately.

How this affects cash flow

The $200,000 grant was received in one lump sum in January, making the bank balance appear strong. However, the funds must last the entire year.
The Medicare reimbursements expected for January services haven’t been received yet, meaning there’s a temporary cash shortfall.

When the clinic purchases medical equipment in February, the cash balance drops by $30,000 immediately, even though the P&L reflects the cost gradually through depreciation.

At the end of January, the P&L might show a modest surplus because of the steady recognition of grant income and expected reimbursements. However, the actual cash position is volatile due to lump-sum funding and delayed payments. If the clinic doesn’t carefully manage its cash flow, it could run out of money before the end of the year, even if the P&L looks stable.

This example highlights the importance of budgeting and financial planning for NFPs. It ensures that they have sufficient cash to cover operational needs while reporting financial performance accurately.

Understanding these differences is key to making informed financial decisions. It is essential to monitor both reports. Don’t rely on just one financial statement. Reviewing the P&L and cash flow statement gives you a nuanced view of your organisation’s financial health.

Keep an eye on accounts receivable and payable. Ensure customers and clients pay on time and track upcoming payments to avoid cash shortages. Having a visible budget and setting aside funds for loan repayments and capital purchases is essential to prevent unexpected cash shortages.

Understand your funding cycle (especially for NFPs): Grants, donations, and sponsorships often come in lump sums but must be allocated over time. Properly managing these funds ensures financial sustainability.

The gap between P&L and cash flow can be frustrating, but it’s normal. Your financial excess reflects the financial performance of your organisation, while cash flow tells you how much money is available to spend. By understanding the reasons behind these differences and managing both effectively, you’ll have better control over your financial future.

If you’re unsure how to interpret your financial reports or need help with cash flow management, working with a professional accounting firm specialising in the NFP sector can help ensure you make the best financial decisions for your NFP.

At Accounting For Good, we work with NFP organisations with a turnover of $1M or more.

Contact us for a free consultation if your organisation needs expert financial guidance. Let us handle your accounting needs so you can focus on what matters most—serving your community and driving positive change.