Cash flow versus profit

2016-05-08_006After many stressful days and sleepless nights, your business has finally taken off. Your customer base is growing, staff and customers are happy, sales are up and you’re making a profit. Now, you have tax to pay. But why isn’t there enough money in the bank to pay it?

It’s at this point that many small business owners discover the true value of cash flow reports.

Profitability is usually the first thing people think about when measuring success. But your profit and loss statement can be misleading because it only measures what is left over after expenses come out of your sales.

It fails to take into account other transactions, such as principal repayments, personal drawings and asset purchases, which are all hidden away on your balance sheet and are critical to determining what appears on your bank balance.

It’s your cash flow report that captures what is going in and out of your bank account. This information is necessary because it allows users to see how the business is managing its cash position, and whether it has sufficient funds in the bank to meet its cash obligations. The key factor in staying solvent is receiving more cash than you spend, and this is exactly what a cash report determines. It’s for this reason that many people consider the cash flow report to be the most important in a company’s financial statements.

After your bank accounts are reconciled, accounting software can be used to generate monthly cash summaries so you know exactly how your business is tracking from month to month. This will help you identify where all your money is going so you can make decisions for the future health of your business.