The cash flow statement: why your P&L shows a profit and your bank account is empty

Your P&L shows a profit while your bank account is empty because the two measure different things: the P&L counts rent when it is charged and a bill when it is recorded, while cash moves on other dates and to places the P&L never shows, such as unpaid rent, deposits held, loan principal, owner draws, and the new roof. The cash flow statement lists those movements and reconciles the period's profit to the change in the bank balance.

It is the 5th, 10:20 AM. July's owner statement for the Maple Street building went out yesterday showing $6,400 of net income, and the owner has replied with one line: the building's account is down $5,300 from June, so where did the money go. The roofer's deposit was $5,000. Unit 3 has not paid July. The owner took their usual draw on the 15th. Two deposits went back to residents who moved out. None of that is on the statement they are holding, and all of it is in the balance they are looking at.

This is a spoke of Property Management Reports: What Owners Actually Expect, which covers the package an owner receives and the suite behind it. This one covers the cash flow statement: what it is, why the P&L and the bank account disagree, how to read the statement from the top, and how Scaalr builds it from the ledger.

What a cash flow statement is

A cash flow statement is the financial report that explains the change in a business's cash over a period by sorting every cash movement into three sections: operating activities (the day-to-day business of collecting rent and paying bills), investing activities (buying or selling long-lived assets), and financing activities (loans, principal repayments, and the owners' contributions and draws). The last line is the net change in cash, and it has to equal the difference between the bank balance at the start of the period and at the end.

The indirect method, the way nearly every accounting system builds the operating section, starts from the period's net income and adjusts it instead of listing every receipt and payment. It adds back expenses that used no cash, such as depreciation, then corrects for the balance-sheet changes that moved cash without touching the P&L, and the result is the cash the operation produced. The U.S. Securities and Exchange Commission's Beginners' Guide to Financial Statements describes the statement as the report of a company's inflows and outflows of cash, and OpenStax's Principles of Accounting walks the indirect method step by step; the arithmetic below is theirs, not a software convention.

Why profit is not the same as cash

Profit is what a period earned after the expenses that belong to it. Cash is what sits in the account on a date. The two part ways in two directions. The first is timing: the income statement, which most operators call the P&L, records income and expenses when they are earned or incurred, and the money arrives or leaves days or months later. Rent charged on the 1st is income on the 1st whether or not the resident has paid, and a contractor's invoice dated the 28th is an expense on the 28th whether or not you have paid it.

The second is the set of movements that are not income or expense at all and never reach the P&L. A security deposit received is a liability you hold, as Security Deposit Accounting for Property Managers explains. The principal portion of a loan payment reduces a debt. A new furnace is an asset that becomes expense only slowly, through depreciation. An owner's draw is a distribution of equity. Sales tax collected belongs to the government. Every one of them moves the bank balance and leaves net income exactly where it was.

The table below sorts the movements that most often separate a property business's profit from its cash, and for a residential portfolio the list is short enough to learn once.

The last column is a set of signs: an asset that grew took cash and is subtracted, and a liability that grew supplied cash and is added.

How to read the statement, from the top

The July numbers from the Maple Street building fit the statement's own order exactly. Net income was $6,400. Unit 3's unpaid July rent is $1,900 of income with no cash behind it. Two deposits of $1,800 went back to departing residents. The plumber's $800 invoice was recorded on the 30th and is not yet paid. The roofer's deposit was $5,000, and the owner's draw was $2,000.

Read it from the bottom up when you are short of time: the reconciliation line says whether the statement is complete, the net change says what happened to cash, the subtotals say where, and the lines say why. In July the operation produced $1,700 of cash on $6,400 of profit, the rest sits in one resident's unpaid rent and two closed tenancies, and the account fell because of a capital decision and a draw, neither of which was ever going to appear on the P&L.

How to read a cash flow statement, step by step

Once the month is closed the reading takes ten minutes, and the order matters more than the speed.

1. Run it for the closed month, after the bank is reconciled. A statement that starts from an unreconciled cash balance is explaining a number nobody has confirmed; the procedure is in Bank Reconciliation for Property Managers: Step by Step.
2. Check the reconciliation line first. If the statement's net change does not equal the change in the cash accounts, an account is unmapped; fix the mapping before reading anything else.
3. Confirm net income against the P&L for the same dates. Same period, same number. If they differ, the two reports were run for different dates.
4. Read each working-capital line as a question. Receivables up asks who has not paid, which the A/R aging report answers by name and by age. Payables up asks what you owe and when. Deposits held down asks who moved out and whether the refunds were right.
5. Read investing as the month's capital decisions. Each line should match a purchase you knew about; one you did not is a coding error or a surprise, and both need a look.
6. Read financing as the owner's and the lender's share. Principal paid, contributions received, draws taken. This is the section that most often explains an empty account after a profitable month.
7. Compare to the prior period, and write the owner one sentence per line that explains the gap. The statement is the answer to the question they were going to ask.

Step 2 is the one that gets skipped, and it is the one that makes the other six trustworthy: a statement that reconciles to the cent is a complete list.

How Scaalr builds the cash flow statement

In Scaalr the cash flow statement is the Cash Flow tab of the Reports area. You choose a from and to date (defaulting to the first of the month through today), optionally compare to the prior period or the same period a year earlier, and view it; the report labels itself as the indirect method and shows one table per currency, with variance columns when a comparison is on.

The arithmetic follows the method above, line for line. Net income is computed from the posted entries dated inside the period, with year-end closing entries left out. The add-backs come from the expense accounts you have marked as non-cash. The working-capital lines come from every balance-sheet account mapped to operating, with the sign already applied; investing lines from the accounts mapped to investing, so a purchase shows as cash out; financing lines from the accounts mapped to financing: loan principal, owner contributions, owner distributions. Each section subtotals, and the three subtotals sum to the net change in cash.

Beneath the table the statement checks itself: the net change per statement is set against the change in the accounts flagged as cash or bank over the same period, with opening cash, closing cash, and the variance shown. Within a cent it reads as balanced. If it does not, the panel says to check the working-capital lines and the mapping, and a second panel names every balance-sheet account that has no cash flow section, because their activity is left out of the statement until they are tagged. On an account that encrypts its ledger, the totals lock until the secret is entered, and the export waits.

The mapping lives in Accounting Setup, on a Cash Flow Mapping tab beside the chart of accounts described in Property Management Chart of Accounts: How to Set It Up. Every balance-sheet and expense account on the tab has a section, operating, investing, financing, or not mapped, and every expense account has a non-cash checkbox. The system accounts arrive mapped (receivables, payables, and the sales-tax accounts as operating, retained earnings as financing), and the bank accounts are flagged as cash and kept out of the sections, because they are what the statement explains. An account you add gets a suggested section from its number and name (receivables, payables, prepaids, and deposits to operating; an asset numbered 1500 to 1999 or named for equipment or a building to investing; equity, mortgages, and loans to financing; depreciation or amortization marked non-cash), and you can change any of them. The accounts the entry templates create the first time they run, security deposits held, prepaid insurance, and the owner contribution and distribution accounts among them, arrive without a section and appear in the report's untagged list until you tag them, so the first run of the statement doubles as the mapping check.

The statement runs for the whole ledger, one section per currency; there is no per-property cash flow statement, and the per-building question is answered through property-linked accounts and the owner statement. It exports to Excel, one worksheet per currency with the sections and the reconciliation rows, and it prints, and it is on every plan, including Starter.

Back to the 5th, 10:20 AM. The reply to the owner is July's statement: net income $6,400, less $1,900 of rent still owed and $3,600 of deposits returned, plus $800 of the plumber's bill not yet paid, $5,000 to the roofer, and the $2,000 draw. Cash down $5,300, and the reconciliation line agrees to the cent. The owner's next question is about the roof, which is the right question.

Key questions

What is the difference between a profit and loss statement and a cash flow statement?

The profit and loss statement measures what a period earned: income when it is charged and expenses when they are incurred, whether or not money moved. The cash flow statement measures what happened to cash in the same period, starting from that profit and adjusting for every movement the P&L timed differently or never recorded, then sorting the result into operating, investing, and financing activities. The first answers whether the business made money; the second answers where the money is.

Can a business show a profit and still have no cash?

Yes, and in a rental business it is normal rather than alarming. Rent charged and not yet collected is profit with no cash behind it, and a roof, the principal on a loan payment, an owner's draw, and a returned deposit each take cash while leaving profit untouched. The cash flow statement shows which movements did it, and the reading becomes a warning only when cash from operating activities is negative month after month.

Is the P&L the same as the income statement?

Yes. The profit and loss statement (the P&L), the income statement, and the statement of operations are three names for one report: the income earned in a period, less the expenses of that period, ending in net income. An owner statement is usually the same report cut to one owner's properties. None of them is a cash report; the cash flow statement is the one that explains the bank balance.

Is the mortgage principal an expense on the P&L?

No. Only the interest portion of a mortgage or loan payment is an expense. The principal portion repays the debt and reduces a liability on the balance sheet, so it never appears on the P&L, which is one of the most common reasons a building shows a profit its owner cannot find in the bank. On the cash flow statement the principal appears under financing activities as cash paid, which is where the gap becomes visible.

Where do security deposits go on a cash flow statement?

Under operating activities, as the change in the deposits you hold, and never as income. A deposit received is cash in and a liability up, so the statement adds it; a deposit returned is cash out and the liability down, so the statement subtracts it. The deposit account has to be tagged as operating for that to happen. An untagged deposit account leaves a hole in the statement exactly the size of the month's move-ins and move-outs.

Which Scaalr plan includes the cash flow statement?

All of them, including Starter. The cash flow statement, the cash flow mapping, and the rest of the financial statements are part of every plan; Starter is free for the first 5 units, then $0.99 a unit a month, and Growth is $99 a month for the first 50 units, then $1.49 per additional unit. Ledger encryption, which locks the statement's totals until the secret is entered, is Growth and up.