By Ted Chapekis
The Accounting Office
How confident are you in understanding your cash flow? Are you comfortable with the term? Many business owners are not. This is surprising, given that all businesses essentially run on cash, and cash flow is the lifeblood of one's business.
Some business experts even say that a healthy cash flow is more important than your business's ability to deliver its goods and services! Although hard to believe, consider this: if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, you're out of business!
It seems much of the accounting industry and their small business clients are only interested in completing tax returns and filling out forms. Smart businesses don't settle for number crunchers. They seek a firm that will provide regular bookkeeping and financial statements, preferably every month. Ask for more than a Balance Sheet and Income Statement. Cash Flow Statements are vital to your business.
Many believe delivering these tasks are prohibitively expensive or will make their lives more difficult. In fact, many firms are able to deliver these services very affordably and the goal should be to save the client time and confusion by arming them with tools and information to, more effectively, run their business.
What Is Cash Flow?
In simple terms, cash flow is the movement of money in and out of your business. These movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.
Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.
Cash Flow Versus Profit
Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter or one month. Profit is what is used for calculating and reporting the business's taxes.
Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business. It is concerned with the movement of money in and out of a business. More importantly, it is concerned with the times at which the movement of the money takes place.
Theoretically, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.
Remember, a sale is booked when the sale is made - not when the cash from the sale is actually received. Days, weeks, even months may transpire before the cash catches up with the sale. In the meantime bills are being paid. As a result, these events may cause other missed profit opportunities or force a business to seek funding, thus creating debt. Should this happen often enough or occur in large numbers, bankruptcy could follow.
Analyzing Your Cash Flow
The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company's short-term reputation as well as position it for long-term success.
The first step toward taking control of your company's cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Accurate financial statements, including a cash flow statement, is imperative in analyzing these crucial components. Narrowing these cash flow gaps are the key to cash flow management.
Some of the more important components to examine are:
Of course it makes sense to take advantage of opportunities like quantity or other discounts. Some businesses require additional expenditures to expand their business. As a result, some cash flow gaps are created intentionally. Unavoidable cash flow gaps include seasonal businesses which may require stop gaps like lines of credit or loans.
Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.
2012 appears to be much improved over previous years. Now is the time to take advantage of growing markets. Be sure to be properly prepared!
The Accounting Office, Inc. has served small and medium sized businesses since 1993. Learn more by visiting http://www.accountingofficeinc.com or emailing firstname.lastname@example.org.