If you run a small business, you probably run around non-stop being pulled in 20 different directions.
You’re not alone. It’s the case for most small business owners. However, when you’re juggling so many tasks, something like small business accounting or how to manage your company’s finances can fall through the cracks.
Most entrepreneurs have grand ideas of how they want to run their company, and managing the books isn’t exactly the sexiest topic. Well, we’re here to help.
It’s time to learn more about balancing your company’s books, as we talk cash flow vs. profit.
How to Manage Your Company’s Finances
Cash flow and profit are two closely-related terms that often get confused. Let’s talk profit first. Think of profit as your “gross revenue.”
All “gross revenue” means is the money you’ve made total, before subtracting any expenses. Your cash flow would be the amount of money going into and out of your business. Cash flow takes into account income and expenses.
Most experts view cash flow as the lifeblood of any business. Profit can be a great measure of your business’ health on paper, but when it comes down to the real life health of a company, look to the cash.
The Importance of Cash Flow
Cash flow is important because it literally translates to the amount of cash in your business. If your cash flow is slow, or non-existent, you don’t have any cash. Without cash you can’t buy the things you need (marketing, hiring employees, etc.) to keep your business afloat.
This is where accounting comes into play. There are two general theories on how to manage your company’s finances: cash and accrual. If you are using the cash accounting method, then you’ll naturally be aware of the cash flow of your business.
However, if you’re using accrual accounting, then you may want to ask a bookkeeper to generate cash flow statements in order to keep an eye on it.
Cash Flow Statements
Cash flow statements are one of the three most important statements for the health of your business. They are typically concerned with three areas of cash management, Cash flow from operations, cash flow from investing, and cash flow from financing.
Cash flow from operations is any money earned or spent through the day-to-day operation of the business. Think of it as cash flow related to what you do.
Cash flow from investing is money gained or lost due to investing. This can mean investing infrastructure as well like new machines or systems.
Cash flow from financing is money moving in and out of the business due to debt. This can be business loans, lines of credit, mortgages if you’re in the real estate space, etc.
Keep an Eye on Your Cash Flow
There you have it. While it can be confusing, you don’t have to be a bookkeeping geniusin order to keep track of your cash flow. However, if you’re still struggling, we can help.
If you have any other questions or would like to learn more about cash flow vs profit, drop us a line online or stop by our blog.