The Startup Ideas Podcast
The best businesses are built at the intersection of emerging technology, community, and real human needs.
P&L statements are misleading for startup survival decisions because they use accrual accounting that doesn't reflect actual cash timing
The Reasoning
P&L shows revenue when contracts are signed, not when cash is received. Shows expenses when incurred, not when cash goes out. This timing mismatch can show profitability while company runs out of cash for payroll
What Needs to Be True
- Business has timing mismatch between revenue recognition and cash collection
- Company has fixed expenses like payroll that require cash on specific dates
- Customer payment cycles are longer than expense payment cycles
Counterargument
P&L provides important business trend information and is required for investor reporting and tax purposes. Cash flow alone doesn't show underlying business health
What Would Change This View
If most startups had same-day payment cycles and minimal timing differences between accrual and cash accounting
Implications for Builders
Build 13-week cash flow systems parallel to P&L tracking
Make survival decisions based on cash, growth decisions based on P&L
Educate investors on cash vs accrual timing differences
Concentrate cash in single account to eliminate self-deception
Example Application
“SaaS company closes $500K annual contract (shows as revenue on P&L), but customer pays $125K quarterly. With $80K monthly burn, company appears profitable but is one payroll cycle from bankruptcy.”
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