Managing Your Company's Cash Flow
Cash flow is an entirely different subject than profit.Cash flow is defined as the money coming into and going out
of the business bank account. Sometimes that cash flow will
not be synchronized with the profit. Perhaps the profit
will show on the books well before or well after the cash
flow occurs.
You may be tempted to think that you should be able to
spend anything in your bank account. That money in the
account is actually the cost of doing business and possibly
some profit left over from doing so. You are heading for
disaster if you go out and spend that money because then
you will be hard pressed to meet things like payroll and
other expenses.
Some businesses use holding account for times when a
significant sum of money comes in before the completion of
the job. This helps the bank account from appearing to far
greater than it truly should be. The money is not
considered earned by the company until the job is
completed. Then the accountant will transfer it to the
appropriate account.
What would happen if someone gave your business money but
changed their mind before the job is actually performed?
The money in your cash flow never seems to have any
problems "flowing out", but you have to be careful and make
sure it is adequate to cover all of the expenses that arise
when doing business. If your cash flow dries up, your
company might be dead in the water.
Profit, on the other hand, is whatever is left over after
all the expenses relating to doing business have been
cover. This is the money that you can use to make capital
improvements, investments, and perhaps even raises for your
overworked and dedicated employees!
There are some people like a former boss of mine that
refused to keep a ledger for his business. He thought that
he could just give the bank a call, ask his balance, and
that amount was his to spend on whatever he needed. While
this fantasy is nice to believe, it does not take into
account that payroll, expenses, bills, and other priorities
had to be met with that money and he was literally
jeopardizing his business by having this practice.
I have worked for people that did not keep a ledger. They
simply called the bank to find out their balance and
assumed that that was the amount of money they could spend.
These people could not be bigger fools because they never
take into account outstanding checks, upcoming expenses,
payroll, or taxes. What would happen if some unexpected
expense were to arise?
You will either become buried in debt or not be in business
at all if you do not know how much it costs to run your
company or maintain adequate cash flow to pay your expenses
on time. With a little forethought and planning, you can
come up with a one-year plan and even forecast costs further
into the future. Then, by tracking performance, you can
adjust your plan accordingly.
Running a business in the dark is scary. By having a
clear understanding of your financial needs, it is possible
for you to operate the business in a well-coordinated and
orderly manner. Any decent bookkeeper or accountant can
help your set up an accounting system for your company that
will be more than worth the expense because it gives you
control of your financial universe.
About the author: Ken Bidgood writes exclusively for
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