Cash flow - we all know what this means. It’s the total amount of money coming into and out of your business. Every business brings in money on sales and spends money on expenses. What’s important is having an idea how much cash is coming into and out of your business on a regular basis, where it’s going, and why. The idea of cash flow is easy to grasp, but maintaining a positive cash flow for your business is another story. What can your business do if you find yourself in cash flow trouble?
Create & stick to a budget.
Take the time to work with a professional and sit down to create a budget and financial plan for your company. Lay out your expected costs, estimate of sales for the month, and anticipated cash flow available. On
To keep track of the financial ups and downs of your small business, there are three important reports to reference: balance sheet, cash flow statement, and income statement. Although there are countless other reports, these three will give you the best idea of where your business stands and where it is headed. Each report provides its own window to further understanding the financials of your business. We challenge you to run these reports once a month to maintain a firm understanding of where your small business stands!
Let’s talk cash flow statements. When is the last time you looked at one for your company? If you’re cringing right now because you just can’t remember, it’s time to change that. Your cash flow statement, or statement of cash flows, shows you where your money is going. The money coming in, the money going out. It’s vital to know where the company’s money is going, and where it’s coming from.
Your cash flow statement is based on cash basis accounting rather than accrual, which means you will record every time money is exchanged. Always keep in mind that your cash flow is not the same as your profit and vice versa. The relationship between the two will vary from business to business, and fluctuations will occur due to the type of business. For example, cider mills will see fluctuations in their cash flow because they’re a season business.
We’ve discussed cash flow before - what it is, what it means for your business - but now let’s discuss what causes cash flow problems. There is a difference between making money and managing cash flow. Managing your cash flow wisely is a combination of being informed, prepared, and making smart decisions. Cash flow problems stem from one of these factors faltering along the way.
One of the obvious causes of cash flow problems are profit issues. This could be lack of profit or sporadic profit. If your company has down months where you make very little money and then shoots up during peak times of the year, you have sporadic profit, and this causes issues for your business. It’s hard to do virtually anything if your business has no money - pay bills, complete payroll, or stay afloat.
Neglecting your bookkeeping is another cause of cash flow issues. Not having up-to-date records on the ins and outs of your business means you’re conducting business blindly. How can you make informed and financially safe decisions for your business if you have no records? This goes hand-in-hand with another cause of cash f
If you’re just starting to navigate your books, you may be unsure of some of the lingo. It’s like a different language for those outside of the accounting world, but the more you work with your books, the quicker you’ll catch on. What’s important is to think of everything in terms of your business; these terms provide you with vital information about your company’s standing. Let’s go over some common terms you’ll frequently hear and need to use in order to discuss and understand your books.
Does your business use cash basis accounting or accrual accounting? What makes the two methods different is the timing of when sales and/or purchases are recorded in your accounts. Cash basis only recognizes income and expenses when money has been actually been exchanged. Accrual recognizes income and expenses as they’re earned/billed, whether they’ve been paid or not.
Let’s talk about reconciling your account(s) on a regular basis and why it’s necessary for not only your bookkeeping, but your business. First, what does it mean to reconcile your account? This means you compare your books to your bank accounts over a period of time to make sure everything aligns perfectly (example: comparing your records to your bank account from March 1 - 31, 2019). If there are any discrepancies, you can catch them and act on it. Also, note that you only need to reconcile your accounts if you use the accrual method of accounting. If you use cash basis accounting, then every transaction is recorded at the same time as the bank, so there are no discrepancies.
Whether you run your own business or just work on the books, it’s imperative to know all the lingo. When you work on your books, these factors will tell you quite a bit about your business’s financial health. We know there seem to be an infinite number of terms in the accounting and bookkeeping world. It’s almost like a different language!
Your financial reports tell you everything you need to know about your business - but do you know what they’re saying? Or what all the little pieces mean?
Financial reports are a compilation of all the numbers floating around your company. There’s your Balance Sheet, which supplies you with a detailed look at your company’s financial health at any particular moment in time. It gives you the dollar amount of assets and liabilities in your company’s net worth. This includes fixed assets, inventory, cash, accounts payable and receivable, payroll liabilities, line of credit, and more. The Balance Sheet also tells you the equity in the business.
Running a business is a challenge. Keeping up with your books is one moving part of running a business. This can either go incredibly smoothly or be a complete disaster. If you’d prefer the former, we strongly recommend you check out QuickBooks. Not only will QB make your bookkeeping easier, it’s also a great tool for helping you run your business. Here are several reasons why QB should be your bookkeeping software:
Money that goes in and out of a business is referred to as cash flow. That’
Bookkeeping is the silent hero of your business. It’s solid and reliable. It keeps you grounded, anchoring you down in one place when things become chaotic. Many factors may influence your business, but the numbers don’t lie. The numbers are the black and white of your business, the “this is it” aspect that cannot be twisted.
Why not bring this anchor into your home? You don’t need a computer - grab a notebook and start recording money in and money out. Keep it simple. Break it down per month, record your expenses, your income, everything. At the end of the month, do the math and see if you came out ahead or behind.
A successful business can be traced back to two things: fantastic finances and excellent marketing. The heart of your business lies in a perfect combination of these two factors.
Let’s talk marketing.
You created your business. That’s step one, and arguably the easiest step. Now what? You need customers. But, how do you get customers? First, they must know about you. If you don’t say “hey, hello, we’re here to service you!” using strategic marketing tactics, then you essentially don’t exist. To get people to know about you, that’s step two.
Many people believe that having everything right at our fingertips at a moment’s notice is a bad thing. However, when it comes to your accounting records, it is the best thing. Real-time accounting allows you to access and check your records at any time from any device, 24 hours a day, day or night.
Accounting is an essential component of every business regardless of size. It’s important to keep in mind the basic do’s and don’t’s of accounting that not everyone may know, but should! These are common and often unnoticed mistakes that can lead to future problems.
Cash Flow vs. Profit
Don’t assume that profit also means there’s cash flow. What’s the difference? Cash flow is the inflow and outflow of money while profit is the extra money left over after expenses are deducted. It would be nice to assume that profit leads to cash flow, but that could give you a distorted view of how well (or not) your business is doing.
Bad Bookkeeping Records and Communication
Not taking your bookkeeping seriously nor communicating with your bookkeeper enough are simple mistakes that need to be avoided. Effective bookkeeping begins with recording each and every transaction. This includes not forgetting to record small transactions—these add up over time. Not only should your transactions be recorded, but they should be categorized. Organization is important for accurate records.
To have these transact