7. P&L and Cash Flow: Profit Is Not Cash

A business owner needs two reports, and they must not be mixed up.

• The P&L (profit and loss statement, or income statement) answers "did we earn money?". Revenue comes first, then expenses are subtracted in steps: cost of goods sold (coffee, milk, cups) → gross profit; rent, payroll, marketing and depreciation → operating profit; tax → net profit.
• Cash flow answers "will there be enough money in the bank?". An espresso machine bought for $24,000 is a huge cash outflow in the month of purchase, but the P&L records it little by little through depreciation ($1,000 a month here, straight-line, as with SLN).

The simplified indirect method: Cash flow = Net profit + Depreciation − Capital expenditure. Depreciation is added back because it is an on-paper expense: the cash already left when the machine was bought. Ending cash for the month = opening cash + cash flow.

No income tax is due in a loss-making month, so tax is calculated as =MAX(0,profit*rate). Real accounting also carries losses forward to future periods; we leave that out.

Note: the 20% flat rate is only a practice number. Real tax rules differ by country and business type and change over time, so check current rules or ask an accountant before real calculations.