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What is a better indicator of the overall performance of a  business the profit and...

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foo12345 | eNotes Newbie

Posted May 27, 2010 at 12:48 AM via web

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What is a better indicator of the overall performance of a  business the profit and loss statement or statement of cash flows and why?

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dano7744 | College Teacher | (Level 2) Educator

Posted May 27, 2010 at 1:59 AM (Answer #1)

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All businesses are in business to make money. Unless of course they are "not for profit". The best indicator is the P& Lstatement because it is what it says it is, a statement of current profits and losses. A company that continually fails to meet profit estimates will falter and drop by the wayside. Cash flow is important to the overall health of any business entity and with inadequate cash flow the conduction of the business will be adversely affected. Some companies struggle to meet payroll every week. Private and institutional investors alike look to the P&L for guidance when they are making investment decisions. 

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paulagz | Student, Undergraduate | Honors

Posted May 27, 2010 at 1:22 AM (Answer #2)

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The better indicator of a busineses performance is the profit and loss statement because it reveals overall financial health over a period of time.  This indicates consistancy and stability in spite of market fluctuations and is a reasonably good predictor of future performance.

On the other hand. a businesses' cash flow statement is subject to influences of short term natures such as the liquidation of assets or layoffs in the work force.  It may also indicate the sale of stocks - all of which, rather than reflecting sound fiscal stability , may indicate a busiesses imminent demise in the worst case.

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