Controlling Cash Flow

Total words: 609
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 The money being deposited and withdrawn from a bank account constitutes cash flow and sometimes it is not at all synchronized with profit.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.

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.

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!

If you look at profit - that money which is left over after cost of doing business, payroll, and overhead - THAT is spendable money for capital improvement, investment, raises, or other needs.

I worked for a man once who didn't keep a bank ledger. He just called the bank, asked for his balance, and felt that was the amount he had to spend. He was so wrong. He didn't allow for outstanding check, upcoming bills, outstanding payroll, and taxes. Not to mention what would happen if one of the large company trucks broke down and needed costly repair.

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.

Operating in the dark is a scary thing. Plan and operating with a light shining on your financial picture, differentia t ing the different funds you hold and their purpose and you will operate in a clear, well-planned manner. A good bookkeeper or accountant can set up a system that can easily be maintained by your office to do business in this enlightened manner and the cost is well worth it if you do not understand accounting yourself.

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