There are alot of definitions as to what exactly cash flow
means which can cause a little confusion. This is how I
explain cash flow. It is the amount of money you have left
during a given period of time once all your bills are paid.
But lets not confuse this with profit and loss statements.
Cash flow is a physical thing, how much actual cash is left
in the bank, while profit and loss statements are
recordings in your financial statements but don't reflect
physically held money.
Now if you run a retail business that generates immediate
cash from each sale then cash flow and profit and loss
statments will more closely reflect each other. But if you
are in the business of billing people and waiting to get
paid then cash flow becomes the more important of the two.
To further explain the concept of cash flow we'll compare
it to a basic profit and loss statement. Over the course of
a month or year you'll make sales to customers and you'll
bill them at either the time of the sale or once the order
is filled depending on the business you're in and the
accounting methods you use. When you buy something or pay
someone you account for the money right away even if you
have thirty days to pay them. Again this depends on your
accounting methods but for many small businesses this is
the simplest method of accounting to use. Once a bill comes
due you pay it.
With cash flow we don't worry about what is billed but
instead we worry about how much money is actually
collected. On the other end we worry about how much money
we actually give to our vendors, employees and other people
we owe money to. To stay in business we have to keep paying
them. We may be late on occassion but that bill isn't going
anywhere till we pay it. So cash flow in it's most basic
form is how much money we collect and how much money we
send out. For any business that has to give credit to it's
customers this is where we can have a problem. Not all your
customers are going to pay on time.
It is totally possible for a company to show a profit while
in fact losing it's shirt. Inevitably your going to have
customers that can't pay their bills on time. This of
course can be for any number of reasons. The one you'll
need to be most aware of is they don't have the money to
pay you. That's the one you could end up facing yourself if
you're not careful.
Ideally the amount billed in a given month and the amount
collected will be virtually the same or you'll have
collected more than you sent out. Then it's a simple matter
of managing your expenses. In a perfect world that would be
the way it goes but we know better don't we. What needs to
happen is that you start to manage your cash flow. You need
to make sure that what you are spending isn't exceeding
what you are collecting not what you're billing. Hopefully
you have a credit line with your bank that can help
alleviate the problem but if not you need to be very
careful or you might wind up using something like your
credit cards to help cover the bills. That is only a short
term fix that will just compound the problem later.
So while your profit and loss statements are in themselves
just as important as ever the real gauge of your companies
immediate health might better be found in your cash flow
statement. Because ending up with a negative number on that
balance could eventually leave your bank account empty.
----------------------------------------------------
Cash Miller is an experienced entrepreneur and speaker who
has spent over a decade as a small business owner. His
years of experience in small business cover such topics as
planning, management, marketing, human resources,
ecommerce, and taxation. If you are looking for more
information on this subject and others related to starting
and running a small business you can visit his website at
http://www.SmallBusinessDelivered.com
No comments:
Post a Comment