Controlling Your Company’s Cash Flow
Cash flow and profits are not even close to the same
things. The money being deposited and withdrawn from a
bank account constitutes cash flow and sometimes it is not
at all synchronized with profit. Profits may appear on the
books but are nowhere to be found as far as cash flow is
concerned.
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.
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.
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.
You do not want to run your business and not know the true
state of your finances. By allocating funds for all
expenses, you can run your business in an organized and
efficient manner that will ultimately yield you greater
profits in the end. You may want to have an accountant or
bookkeeper set your books up for you so that you need only
post transactions. The order and feeling of control you
have when doing so makes it well worth the effort.
Ken Bidgood is the chief writer for, and editor of
Advertising XP,
it’s one of the webs most up to date Business sites,
while you’re there sign up for the free newsletter.
For more quality articles on Business why not visit:
http://www.advertisingxp.com/articles
There’s also a free mini-course available that will
teach you how to get loads of free targeted traffic.