How could this possibly be? If I’m showing a profit, isn’t my company doing well? Don’t I have money in the bank?
Not necessarily. The culprit is poor management of:
CASHFLOW
Failing to properly manage cashflow is one of the largest deficiencies I see in small businesses. I am constantly being told, “My books show that I made money this month. Why is my cash balance so low?” Failing to monitor cashflow will sink your small business faster than anything else. Cashflow is one of the KPIs (Key Performance Indicators) that is vitally important to monitor on a regular basis. Here are some tips that can help:
Cash does not equal profit
Cash = Money In – Money Out
Net Profit = Revenue – (direct costs + expenses)
Money in is not always revenue. Cash can come into a business from investments made to the company (equity), money paid back that had been previously loaned out (asset), or loans taken from a lender (liability). Likewise, the opposite is true. Money out can be something other than expenses. Repayment of loans, dividends to investors (like you, the owner), and loans made to others take cash out of the business, but have no impact on the net profit.
Expenses and direct costs aren’t always money out
If you receive a bill, such as a bill for utilities, and record it into your accounting system (you ARE doing that, right? Right?), it is registered as an expense, reducing net profit. However, the cash remains in your account until you pay the bill.
Revenue is not always money in
If you sell your product and services on credit, or simply send out invoices, the sales are recorded as revenue. But, depending on your average days to get paid, the cash may not come in for 60-90 days.
How do I fix this?
There are several tools available to you that can help manage your cashflow, and make sure there are no surprises. The first option is a simple Statement of Cash Flows. This should be readily available from within your accounting software, or your accountant can create one for you on a monthly basis. Another option is third-party software, such as LivePlan. LivePlan connects to your QuickBooks Online, QuickBooks Desktop, or Xero account. It gives you web-based, realtime metrics to monitor cashflow, and many other important budgeting and forecasting tools.
If you are looking for help with managing your cashflow, or simply would like some help getting setup with some of these tools, feel free to comment below, or send me an email.
Please note: I reserve the right to delete comments that are offensive or off-topic.