Cash flow is the lifeblood of your business, and also the most misunderstood part of business by many business owners. Here are five common myths regarding the Cash Flow Cycle.
Cash Flow Myth #1: If there’s cash in the bank, everything is fine.
Use your statement of cash flow to find out why there is cash in the bank. If the cash is all from financing or selling off assets, that could be a warning sign of trouble ahead.
Cash Flow Myth #2: There is no money in the bank, so we must not owe taxes.
Net income does not equal cash flow. The money could have been spent on items that are not tax-deductible. Make sure your tax planning is measured by more than how much is in the bank.
Cash Flow Myth #3: Building inventory is a good thing.
When you build inventory, you turn a highly liquid asset (cash) into a less liquid asset. That’s part of the theory behind the business management theory of “just in time inventory.” Don’t build inventory at the sake of your cash.
Cash Flow Myth #4: As long as you’re growing, things are going to turn out great!
If your business is growing fast, you’ll need to build up your inventory and staffing; and your G & A expenses are going to climb, too.
Those are expenses that take your cash right now, even though you may have to wait to get paid. You’ll see that in your statement of cash flow. Your business is growing, you have net income, but your operations will be sucking cash. Not enough or too much in sales can kill your cash flow.
Cash Flow Myth #5: When cash is tight, concentrate on sales and forget about reporting; your gut response is all you need.
Calculating cash flow, and the reasons for increases and decreases, is simply too complicated to just trust your gut. If you’re serious about business, watch all three of your financial statements on a regular basis.
In this economy, we’ve had lots of businesses fail because no-one wanted to buy their product or service. But we’re convinced that plenty of other businesses failed because they couldn’t get paid fast enough to keep the doors open and the lights on.
If you want to know where your business really stands, educate yourself. Learn the language of accounting, and, most importantly, learn how to interpret the information provided in your financial statements.
Business owners need accurate financial statements to be able to evaluate the organization’s performance and to create short and long term business strategies. A smart business owner understands his role in the organization and does not become involved in preparing such statements; your time should not be spent on accounting/bookkeeping functions as it adds little or no value to your organization.
Cash Flow Accounting can provide your organization with timely and accurate financial statements– we will use your information to prepare them. Our interactive accounting model will help you cut costs and show you where you can make more money. Contact us, we will take care of your bookkeeping needs and, probably, we will do it for less than what you’re paying now. For more information, contact us at Info@CashFlowAccounting.com.