Managing Your Company's Cash Flow
by Ken Bidgood - © 2005
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.
It is very tempting to see this situation as a "godsend" that can spent on anything the business needs or wants. But, you had better taker a closer look before making this choice. The cash is really only the cost of doing business plus the profits realized from conducting that business. Spending the cash without understanding that you still have to cover material and labor costs is a true recipe for disaster.
If the cash flow arrives before the job is actually done, it may be wise to have a special account to hold this money so that your business account does not seem larger than it is in reality. You or your accountant can then put the money into the correct account so that the cash is not considered earned before it actually is.
If someone gives you a large deposit for a job they wanted you to do for them but then changes their mind before the job is completed, then it becomes a simple matter to refund their money out of the holding account. But, if you did not have that holding account and just put the deposit money into a normal business account, it is very possible that you would spend that money and not be able to provide a refund.
If the money was set aside in a separate account, it is no problem to just refund their cash. But, if the money were just in your regular business account, it might be far more difficult to refund the money because you very well may have spent some of it thinking it was yours to spend.
Cash flow, like the name, is very easy to let "flow". But the cash flow coming in has to cover those crucial expenses that go out - maybe sooner, maybe later, but they WILL go out and the cash flow has to be there to cover them.
Profit, on the other hand, is the money earned after all the expenses of doing business have already been covered. This money can be used to make capital improvements, give out raises, or anything else the business may need or want.
I couldn't take it any longer and had to set some books up for the company so we could track things better. When it was done, we never had to guess what was in the bank and had a full accounting of all expenses that the business could anticipate dealing with over the course of the next year. It was my "one-year plan" and with it there was never any doubt what was profit and what was cash flow.
A good bookkeeping system takes into account how much money is in the bank at any given time, what bills are due and when, all estimated taxes for the year, any potential capital expenditures--essentially, everything is accounted for in the upcoming year. That way, you always know how much of the money in the bank is actually spendable.
You always have to know the cost of doing business so that you can pay your obligations on time and avoid going into debt or even out of business for failure to meet those obligations on time. A one-year plan does not take as much thought or planning as you might think. Once you have one in place, it is not a problem to track your predictions and make modifications to the plan.
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.
