How to calculate Cash Flow and Profits

By: Clint Jhonson

If you have a business which makes use of a money account register to note all your income and expenses then calculating your profits or cash flow is pretty simple. All you are required to do is make a statement that provides you a summary of all your income and expenses. A lot many of such reports like the monthly cash flow report as well as the category spending report allow you to work out your profits. And then there is also the P&L aka Profit & Loss statement.

If you select the monthly cash flow statement, for instance, money gives you a report which gives you a summary of your transactions categorized by income and expense. The net difference between these two will give you your money profits. One vital point that is to be noted whenever you make a P&L statement is the accounting period. Generally you would like to generate a statement to measure profits on a monthly basis, on a quarterly basis or even annually. You should pick out an accounting period where there are sufficient income and expense transactions to get a meaningful and fair summary of your business activity.

We can take an extreme as an example. You certainly would not want to generate P&L statements on a daily basis because they might not contain enough data to make them meaningful. If you did not write a check on a particular day does not mean that you did not have expenses for that day. Or if you did not get a deposit on a certain day does not mean that there were not earnings on that day. Generally, longer accounting periods like months, quarters and years are definitely better than shorter ones like days and weeks to prepare the P&L statement. Expert accountants normally prepare them monthly and annually.

Since money compels you to make use of cash flow accounting, a business P&L statement is basically the same as a cash flow statement. That is, in order to create a cash flow statement you have to go by the same steps that you would follow for a P&L statement. Different account balances in the right combination give you a balance sheet which gives you the summary of what a business owns and what the business owes.

One of the most common accounting rules is to make a balance sheet for the last day of the accounting year. So if your financial year ends on December 31, you would make a balance sheet for December 31 just as you would make your cash flow statement and P&L statement. Same is the case if your financial year ended on March 31. Nowadays with better technologies available, there are companies which make programs that can help you derive all these reports even if you have no accounting knowledge. You can visit them online and some might even provide you with a demo so that you can judge for yourself whether it would be useful to you.

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If you want help with preparing the cash flow statement or even the P&L statement or balance sheet visit us; even if you have no accounting knowledge, you can easily make these statements on your own!

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