Every startup founder or SME owner in India ultimately reaches a point at which they find themselves, whether it is during a funding meeting, during a visit to their accountant, or worse, in the middle of the night and looking at their bank account. they dont know what exactly a difference between P&L and Balance Sheet.
It is the time when you think you are doing well based on your Profit and Loss Statement, but your financial reality does not appear to be stable.
Probably profit is high and cash is scarce.
Perhaps revenue is good yet the debt continues to increase.
Perhaps you are working more than ever but are exposed financially.
This is a pattern that I have observed many hundreds of times. And in nearly all cases, the cause of it is the same:
The founder will know the P&L- but will be unfamiliar with the Balance Sheet.
That is the point where this guide appears. At the conclusion, you will clearly see the distinction between P and L statement and the Balance Sheet, the impact each will have on your business, and the interrelation of the two statements to tell you the true financial health of your company.
It is not a lecture on accounting.
This is a leadership skill.
The reasons why founders have a tough time with financial statements.
Formal accounting is not what most Indian entrepreneurs have been brought up around. We also got to learn business through doing, negotiating with suppliers, balancing client expectations, struggling to keep cash flowing and creating value. And that is why; many founders confuse the concepts of profitability and stability.
You’re not alone in this.
The confusion occurs due to the fact that:
- The P&L is understandable and natural.
- The Balance Sheet is abstract, lifeless and daunting.
- The accounts teams can also prepare statements with the aim of them being compliant rather than being decision-making.
- India cash cycles – late payments, GST credits, marketplace payment – perverts the image.
- Business may appear to be performing well at the moment when it is in fact experiencing stress.
Financial literacy does not include the use of jargon.
It has to do with getting to know how money actually flows in and out of your business.
And it begins with the realization of the distinction between the two statements.
P&L vs. Balance Sheet: The Simplified Model.
This is the reason I tell each founder:
The P&L is a video.
It displays business performance in the past, in a monthly, quarterly, or annual basis.
This is a photograph on the Balance Sheet.
It reveals your business location at one point of time.
And that single difference makes the difference.
A video shows movement.
A photograph shows reality.
A P&L may reflect a fantastic performance when the Balance Sheet shows little or nothing about the weaknesses of the business, i.e., excessive debt, sluggish receivables, poor cash position, or dwindling equity.
Let’s dive deeper.
Understanding the P&L- The Story of Your Business Performance.
Your P&L will inform you about what has occurred within a period. It is the most comfortable statement among most founders since it is the way we think about business in everyday life:
- Did we make money?
- Are we controlling costs?
- Are margins improving?
- Did we grow this quarter?
Making sense of the Flow of the P&L (Simply Explained).
Your P&L contains:
- Revenue
- COGS (Cost of Goods Sold)
- Gross Profit
- Operating Expenses (marketing, salaries, rent, tools)
- EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation)
- Interest & Depreciation
- Net Profit
Everything is dynamic, revenues are coming in, costs are going out and profit or loss is born.
That is why even when your business is stressed out a P&L can give you a positive picture.
Since profit is not cash.
What the P&L Can’t Tell You
This is what founders usually fail to notice:
A P&L does not show:
- The available cash on the ground.
- How much customers owe you?
- What percentage of your funds is held in inventory?
- How much debt you’re carrying
- Your financial strength in business.
- The sustainability of growth.
I once had a chance of working with an agency owner based in Hyderabad and she was proud to present me with her P&L- 22% net profit. However, when we have looked at her financial situation, more than ₹40 lakhs was held up in receivables. Profit looked great. Liquidity was terrible.
That is why, the Balance Sheet is important.
Learning the Balance Sheet- The Financial Strength Snapshot.
In case the P&L questions were: How did we perform? The Balance Sheet questions were:
“How strong are we right now?”
It is constructed on a simple equation:
Assets = Liabilities + Equity
I explain this to founders in the following way:
Assets = What you own
Cash, receivables, inventory, deposits, equipment and investments.
Liabilities = What you owe
Loans, 30 days dues, GST payable, credit card, EMIs.
Equity = what is of business.
The capital of founders + retained earnings.
It is the combination of these three elements that makes you stronger or weaker financially.
What the Balance Sheet Is Telling You.
- True cash position.
- Liquidity risk.
- How much customers owe you.
- Whether debt is manageable.
- Whether equity is between higher or lower.
- Whether you are fundable.
- Whether you are over-leveraged.
- The ability to survive the downturn of the business.
This is important than most founders can imagine.
Good P & L and poor Balance Sheet is similar to a high speed vehicle with a broken engine block.
Flow vs. the Equation -The Hitchhike between P&L and Balance Sheet.
The other interpretation of the difference:
✔ P&L = Flow Statement
Movement over time.
Value is generated through action.
✔ Balance Sheet = Equation Statement
Position at a point in time.
Everything must balance.
This is the reason why the two statements occasionally conflict with each other – and why it is risky to read only one.
Debt-to-Equity Ratio, using Balance Sheet to make a judgment about leverage.
Your Debt-to-Equity Ratio (D/E Ratio) is one of the most useful things you would have within your financial position. No one perfect D/E value, what is a safe one would be based on your industry and stability of cash flow.
D/E Ratio = Total Liabilities ÷ Equity
Here is the way of understanding it as a founder:
- Low D/E → financially stable
- Moderate D/E → can be dealt with, but monitor growth rate.
- High D/E → risky, lenders can be reluctant, there is increased pressure on the cash flow.
I once counseled a Chennai-based logistics entrepreneur who doubled his income within a period of 12 months. The P&L looked fantastic. However, repeated borrowing took D/E into the risk zone. A single client of the business who was paying slowly resulted in a cash crunch.
What your Balance Sheet tells you about risks that P&L will never tell you.
A Comparison: Difference between P&L and Balance Sheet.
| Metric | P&L | Balance Sheet |
| Nature | Video | Photograph |
| Tracks | Revenue, costs, profit | Assets, liabilities, equity |
| Shows Cash? | No | Yes |
| Shows Debt? | No | Yes |
| Reflects | Performance | Strength |
| Helps With | Margin control, growth planning | Loan decisions, funding readiness |
| Risk | Misleading optimism | Hidden instability |
Simply put, this is the distinction between profit and loss account and balance sheet and the reason founders need to be acquainted with either.
In the Indian Businesses Case Studies.
1. D2C Brand in Mumbai
P&L: High sales, good margins
Financial snapshot: Stock accumulating, short term debts increasing.
Outcome: Rapid growth masked the weakness of the structure.
2. IT Services Firm in Noida
P&L: Consistent profit
Financial position: 90 day overdue receivables.
Outcome: : Profitable and illiquid.
3. Coimbatore Manufacturing Unit
P&L: Stable revenue
Financial structure: Heavy leverage, poor equity
Outcome: bank rejected expansion loan.
These are not accounting lessons but strategic lessons.
Myths Founders Believe
Myth 1: Profit means cash.
Often not in India. The refunds of GST, late payments to clients and credit cycles misrepresent reality.
Myth 2: Strength in financial increases growth in revenue.
Most of the fast growing companies fail to sustain themselves as their Balance Sheet fails to counter the scale.
Myth 3: Banks care about sales.
Banks are concerned with solvency, liquidity and leverage.
Myth 4: P&L is sufficient in order to operate a business.
And only in case you like financial surprises.
FAQs
1. What is the difference between P&L and Balance Sheet?
The P&L depicts the performance in the long run. Through the Balance Sheet, there was financial well-being at a point in time.
2. Why do founders look at profit but not cash?
Since profit does not follow receivables, inventory and debt repayments.
3. Which is more crucial in funding?
Both. It is not only your sales that your lenders and investors pay so much attention to; they put the entire emphasis on your Balance Sheet strength and cash flows.
4. What should be the frequency of review of these by founders?
Monthly- weekly in case of aggressive scaling.
Conclusion – Why Knowledge of Both Statements is changing everything.
After the founders have the real picture of what sets the difference between P&L and Balance Sheet, the decision making is altered:
- You cease to measure success in revenue.
- You forget about confusing profit and cash.
- You identify risks earlier.
- You have a better bargain with lenders.
- You scale more sustainably.
Your P&L is a report of how you are operating the engine.
The Balance Sheet and the Engine gives you the answer to the question whether the engine can manage the journey.
Learn both – and you operate your business as a CFO.
Need to know your financial status? The professionals of Accdig would be able to turn your financial statements into strategy. Book a consultation today.
🚀 Also, follow Accdig on Facebook, Instagram, and LinkedIn to stay ahead—don’t miss out! 📱✨
