IF YOU REVIEW ONLY P&L MONTHLY AND NOT CASH FLOW AND BALANCE SHEET YOU ARE IN NO CONTROL OF YOUR FINANCES AND WOULD GET SURPRISES SOONER THAN LATER
If you attend any typical monthly meeting of any company the focus of the discussion is around the reported Profit & Loss Statement and how does it compares with the monthly plan .
And then we look at how much ahead or behind we are against the year to date numbers .
And then deep dive into the reasons for not achieving the same if not achieved or would we able to maintain the same in the coming months.
While all that is fine but in this process most of the companies misses two very important elements
While there may be healthy revenues booked but at the same time if collections are not coming and debtirs are mounting it signals a PROBLEM . Either the sales booked has not been recognized by customers or the customers to which it is done are not in a position to pay .
The end result is that in both the cases the compnay not only spends on the costs but also pays or gets liable to pay taxes on the same .
Similarly another issue can be although the Cash is being collected the Current Liablities or repayments and/or interest payments are not getting paid which would reflect in the Balance Sheet and there would be some Asset ( which may be Fictious ) gets created on the Asset side to balance the inflow where either no actual c ash has been received or received but mis appropriated.
These issues are more in compamies where the customer base is very big and distributed .
Therefore it is very important to review all three P&L , Cash Flow and Balance Sheet and not simply P&L.
And then we look at how much ahead or behind we are against the year to date numbers .
And then deep dive into the reasons for not achieving the same if not achieved or would we able to maintain the same in the coming months.
While all that is fine but in this process most of the companies misses two very important elements
- The Cash Flow
- The Balance Sheet
While there may be healthy revenues booked but at the same time if collections are not coming and debtirs are mounting it signals a PROBLEM . Either the sales booked has not been recognized by customers or the customers to which it is done are not in a position to pay .
The end result is that in both the cases the compnay not only spends on the costs but also pays or gets liable to pay taxes on the same .
Similarly another issue can be although the Cash is being collected the Current Liablities or repayments and/or interest payments are not getting paid which would reflect in the Balance Sheet and there would be some Asset ( which may be Fictious ) gets created on the Asset side to balance the inflow where either no actual c ash has been received or received but mis appropriated.
These issues are more in compamies where the customer base is very big and distributed .
Therefore it is very important to review all three P&L , Cash Flow and Balance Sheet and not simply P&L.
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