Companies spend money to operate. Therefore, to stay in business, they also must bring money in. To be profitable, they must bring in more money than they spend. The movement of money through a company is called cash flow, which is the basis for all business operations.
Cash flow is critical to any business, and a positive cash flow enables a company to be profitable and to remain in business. A negative cash flow moves a company toward financial failure. With a negative cash flow, money is sucked out of the company, and at some point, the company runs out of cash and even runs out of the ability to borrow money. Without money to operate, the company is forced out of business.
There’s an old adage about business that “cash is king” and, if that’s so, then cash flow is the blood that keeps the heart of the kingdom pumping. Cash flow is one of the most critical components of success for a small or mid-sized business. Without cash, profits are meaningless. Many a profitable business on paper has ended up in bankruptcy because the amount of cash coming in doesn’t compare with the amount of cash going out. Firms that don’t exercise good cash management may not be able to make the investments needed to compete, or they may have to pay more to borrow money to function.
Achieving a positive cash flow does not come by chance. Companies have to work at it. You need to analyze and manage your cash flow to more effectively control the inflow and outflow of cash. The ‘trick’ is to undertake cash flow analysis to make sure you have enough cash each month to cover your obligations in the coming month.
Profit does not equal cash flow. You can’t just look at your profit and loss statement (P&L) and get a grip on your cash flow. Many other financial figures feed into factoring your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and debt service. Smart cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss. “There is a secret that very few business owners have discovered (and the accounting community has not done a good job revealing): knowing whether you earned a profit (or created a loss) is not the same as knowing what happened to your cash,” Campbell says. “Profit, as defined by the rules of accounting, is simply revenue minus expenses. Invoicing a customer for products or services you sold to them creates revenue. Actually collecting the money on that invoice is what creates cash.”
A positive cash flow is actually needed to generate profits. You need enough cash to pay your employees and suppliers so that you can make goods. It’s the sale of those goods that helps generate a profit. But if you don’t have the money to make the goods, you don’t end up with the profit. So you really need to structure your business to have a positive cash flow if you want your business to grow and increase profits.
Growing your business puts a huge strain on cash. You almost always have to make investments and bring certain expenses on ahead of achieving the higher revenue and cash flow that comes with successful growth. Maybe you want to open an office in a new city so you can build the business there. Also, you need to build a new facility so you have the capacity to sell to larger customers. Those scenarios (and others) require cash up front.
To put your cash flow situation under control is to begin tracking your cash flow results every month to determine if your management is creating the type of cash flow your business needs. This also helps you get better and better at creating cash flow projections you can rely on as you make business decisions about expanding your business and taking care of your existing bills.
Bank reconciliation is a process that explains the difference between the bank balance shown in an Organization’s bank statement, as supplied by the bank, and the corresponding amount shown in the Organization’s own accounting records at a particular point in time. Such differences may occur, for example, because a cheque or a list of cheques issued by the organization has not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the Organization’s books, or either the bank or the organization itself has made an error. It may be easy to reconcile the difference by looking at very recent transactions in either the bank statement or the Organization’s own accounting records and seeing if some combination of them tallies with the difference to be explained. Otherwise it may be necessary to go through and match every single transaction in both sets of records since the last reconciliation, and see what transactions remain unmatched. The necessary adjustments should then be made in the cash book, or any timing differences recorded to assist with future reconciliations.
Bank reconciliation is a critical tool for managing your cash balance. Reconciling as a process of comparing the cash activity in your accounting records to the transactions in your bank statement is critical in proper cash management. This process helps you monitor all of the cash inflows and outflows in your bank account. The reconciliation process also helps you identify fraud and other unauthorized cash transactions. As a result, it is critical for you to reconcile your bank account within a few days of receiving your bank statement.
Sometime past, bank statement do arrive at the end of the month, but the availability of banking platforms provide access to bank statement on daily basis. Bank reconciliations should therefore be completed to match the record of revenues and payments to those on the statement. Identify cheques that have not yet cleared and deposits that have not yet shown up on the statement. Bank reconciliations should be reviewed by a second party to maintain effective internal control.