Become a Cash-Flow Pro

1071930_check_book_and_statementWhen it comes to small businesses, a majority of business owners consider profit and loss to be the best measurement of their organization’s success, but cash flow is just as important in determining whether or not a company can stay in business. Regardless of whether or not you make a profit, you must have enough cash coming in to purchase materials, pay bills and make payroll in a timely manner or it won’t take long before your business is struggling. That is why every owner needs to understand how cash flow affects their company and how to forecast it in order to ensure that enough cash is available when needed.

This post below discusses a few things that one must pay attention to in running the business.

Cash Flow Versus Profit

Cash flow is simply the money coming in from customers and clients and the money going out to purchasing materials and supplies and to pay bills and employees.

Profit or loss, on the other hand, is the income made by selling your goods and services less the costs of running your business. Income is typically recognized when it is earned, meaning when the goods or services are sold, rather than when the customer’s payment is received. Likewise, expenses are usually entered when the bill comes in, not when it is paid.

Therefore, it is possible that

  • Your books show a profit but actually have a negative cash flow, if your customers are not paying their bills on time.
  • Your books could also show a loss while there may be a positive cash flow, if you are paying your bills to your vendors and suppliers after the due date.

This is why understanding and predicting cash flow is essential to keeping a business operating.

Cash Flow Reports on QuickBooks

QuickBooks users have a number of tools at their disposal for viewing their company’s cash flow and for forecasting it into the future. The first report to use is the Cash Flow Statement. Go To the “Reports” menu, choose “Company & Financial”, and click on “Statement of Cash Flows.”

This report will break down your cash flow as follows:

  • Opening cash balance
  • Net income or loss for the period
  • Activity for each balance sheet account, other than cash accounts
  • Net cash increase or decrease for the period, and
  • Closing cash balance

You might want to run this report for several different time periods, such as the past month, the past quarter and the past year. This will give you a good idea how often are you struggling to meet your cash needs, or if you routinely have enough cash on hand.

Forecasting Cash Flow

Once you understand how cash flow is affecting your daily operations, you can use these tools to predict cash flow for the future. This can be especially helpful if you are planning a big project or considering taking out a loan. Instead of selecting “Cash Flow Statement” on the “Reports” menu, select “Cash Flow Forecast”. With this tool, you can determine what will happen to your cash flow if your customers start paying more slowly or if you delay payments on certain bills and expenses.

You can also enter other assumptions, such as a higher profit or larger loss. This will give you a good idea of whether or not you can afford to move forward with a planned project without putting your company in jeopardy of running out of funds.

So, now you know why understanding cash flow is vital to managing any business. No matter how profitable a company may be, if cash isn’t being received when it is needed, the organization will struggle to remain viable. Using QuickBooks tools, you can easily see how your company’s cash flow is currently working and what might happen to it in the future. With these reports, any business owner has the information needed to make decisions about how to operate today and expand in the future.

Bernard Roesch About Bernard Roesch

Bernard Roesch is co-founder and Managing Partner of Mission Consulting. Bernard’s background in the early years of his career was spent in the manufacturing sector, making his QuickBooks perspective a unique one – he understands the intricacies of a complex environment and then applies his strategic skills accordingly.