Cash Flow Statements: The Accounting Solution to a dangerous problem
Cash flow problems are, more often that not, the contributing factor to the failure of a small or emerging business. Considering the economic downturn, vulnerability and uncertainty of the marketplace, steady cash flow is, now more than ever, important to the small business owner.
By incorporating the cash flow statement into your accounting systems, you are effectively providing your business with the ability to identify cash flow problems and to allow for accounting solutions should cash flow problems be perceived. Cash flow statements are the single most effective accounting solution you can implement in ensuring the survival of your cash flow and thus your business.
Cash flow statements help to ascertain the short term ability of your company of fulfill its necessary financial obligations. By analysing the cash flow statement you are affording your business the time to identify short-term cash flow risks and implement accounting solutions before negative cash flow cripples your company.
Profit vs. Cash Flow
Profit and cash flow are two very separate concepts. Cash flow is much more dynamic than measurements of income or profit. Where profit only reflects income and expenses at a certain point in time, cash flow reflects the actual movement of money in and out of your business as well as the exact times at which the movements occur. Many people don’t realise the importance of the above distinction – you can in fact be a profitable business and still incur a negative cash flow.
How the Cash Flow Statement Works
The Cash Flow Statement records your company’s inflows and outflows. Inflows include: money coming into your business from services rendered or goods sold, bank loans and receiving payments from customers for goods previously issued on credit. Outflows include: money flowing out of your business such as expenses, payroll, paying interest on loans and purchasing fixed assets.
Your cash flow is determined by measuring three accounting components: core operations (essentially cash generated from products offered or services rendered), investing (the purchase and sale of fixed assets) and financing ( which includes repayments of long-term liabilities and borrowing).
The cash flow statement works to reflect the most accurate and actual balances of money coming into and leaving your business by keeping a watchful eye on the above three accounting activities.
Some simple accounting solutions and benefits offered by your cash flow statement:
- Use accounting software solutions such as QuickBooks Pro (the unique cash flow projector allows you to see what cash you will have on hand up to six weeks in the future, all safely based on income recorded previously).
- Do you have a new or young business? Prevent cash shortage by understanding the inflow and outflow of cash in your business; this will help you to avoid a cash shortage crisis.
- Helps you to forecast if you’ll have enough cash for immediate expenses, payroll and interest on loans. Forecasting can also allow you to take action and implement accounting solutions to foreseeable cash flow problems.
- Attracting investors who will judge the economic soundness of your company by your cash flow.
- Useful for dealing with creditors and lending institutions who will want to assess your payment capabilities.
- Assessing your cash flow allows you to tailor your business expansion strategy
- Helps with decisions, planning and management of future financial commitments.
- Accurate information that illustrates the true condition of your business cash flow.
Are you ready to implement better accounting systems into your business? Contact us at QuickBooks. Our tailored software packages offer effective accounting solutions to manage everything from your business cash flow to payroll systems.