Profit and Loss vs Balance Sheet vs Cash Flow
Understand what the profit and loss account, balance sheet, and cash-flow forecast each show—and how to read the three together.
Last reviewed: 11 August 2026 · Editorial policy
Three views of the same business
The profit and loss account explains trading performance over a period. The balance sheet shows what the business owns, owes, and has invested at a date. A cash-flow statement or forecast explains cash moving in and out over time.
No single report answers every question. Read them together to understand performance, resilience, and timing.
| Report | Main question | Typical contents |
|---|---|---|
| Profit and loss | Did the business make a profit over the period? | Sales, direct costs, gross profit, overheads, interest, tax and profit |
| Balance sheet | What does the business own and owe at this date? | Cash, debtors, stock, fixed assets, creditors, loans, tax and equity |
| Cash flow | When will cash enter and leave the bank? | Customer receipts, supplier payments, payroll, tax, assets, loans and owner funding |
How to read a profit and loss account
Start with revenue, then subtract direct costs to reach gross profit. Gross margin shows how much remains from each pound of sales before overheads. Subtract operating overheads to understand operating profit, then consider interest, tax, and exceptional items.
Compare against the prior period and forecast. Separate price, sales volume, direct-cost percentage, payroll, and overhead changes rather than looking only at the final profit number.
How to read a balance sheet
Current assets—such as cash, customer debts, and stock—are compared with current liabilities such as suppliers, payroll taxes, VAT, and short-term finance. A healthy cash balance can mask overdue tax; a low cash balance may be temporary if high-quality customer invoices are about to be collected.
Check aged debtors, stock that may not sell, director or owner balances, loans, tax provisions, and whether equity is positive. Balance-sheet quality matters as much as its headline total.
Why profit is not cash
A £10,000 sale can increase profit before the customer pays. Buying stock can use cash before it appears as a cost of sales. Purchasing equipment uses cash, while the profit and loss account may show depreciation over several years. Loan receipts increase cash without being sales, and loan principal repayments use cash without being an expense in profit.
| Event | Profit effect | Immediate cash effect |
|---|---|---|
| Invoice a customer £10,000 on credit | Revenue and profit may increase | None until the customer pays |
| Buy £6,000 of equipment | Usually spread through depreciation in the accounts | Cash falls by £6,000 if paid immediately |
| Receive a £20,000 loan | No trading profit | Cash increases by £20,000 |
| Repay £1,000 loan principal | No operating expense for the principal | Cash falls by £1,000 |
| Pay Corporation Tax | Tax relates to the relevant profit period | Cash falls when payment is made |
A simple monthly review
Review five questions each month: Are sales and gross margin on plan? Which overheads moved? Which customers are overdue? What tax and supplier payments fall due? What is the lowest forecast cash balance over the next 13 weeks?
Tie the story together. For example, “profit is ahead by £8,000, but cash is behind by £12,000 because debtor days increased and annual insurance was paid upfront” is more useful than either report alone.
Statutory accounts versus management reports
A limited company’s statutory accounts must include a balance sheet and normally a profit and loss account, plus applicable notes and reports. Filing formats can be abbreviated for some eligible companies, but the directors still need adequate underlying records.
Management accounts are designed for running the business. They can be monthly, more detailed, compared with budget, and supported by a rolling cash forecast. Their format should match the decisions management needs to make.
Frequently asked questions
Can a profitable business run out of cash?+
Yes. Slow customer payments, stock purchases, loan repayments, asset purchases, tax, and owner withdrawals can use cash even while the profit and loss account reports a profit.
Is cash shown on the balance sheet?+
Yes. The balance sheet shows the cash balance at one date. A cash-flow report explains how that balance changed, while a forecast estimates how it may change in future.
What should I review first each month?+
Start with cash runway, overdue debts, upcoming tax and payroll, sales, gross margin, and major overhead movements. Then investigate the balance-sheet items that explain differences between profit and cash.