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Controlling Your Company's Cash Flow by Ken Bidgood http://www.advertisingxp.com Profit and cash flow are two very different things. The money going in and out of your bank account is the cash flow. There will be times when the cash flow and profit margin are out of sync. It is possible for the profit to be on the books long before or after the cash flow happens. It is all too easy to look at this situation as a "windfall" that can be spent on something the business wants or needs. But you must look carefully before making such as choice. Some businesses use holding account for times when a significant sum of money comes in before the completion of the job. This helps the bank account from appearing to far greater than it truly should be. The money is not considered earned by the company until the job is completed. Then the accountant will transfer it to the appropriate account. What would happen if someone gave your business money but changed their mind before the job is actually performed? What is someone provides cash flow but later changes their mind and backs out before the job is performed. If you have the money in a separate bank account, you can simply refund their money based on your corporation's refund policy. If the money were not kept in separate accounts, it would not be so easy to make the refund. Cash flow, like the name, is very easy to let "flow". But the cash flow coming in has to cover those crucial expenses that go out - maybe sooner, maybe later, but they WILL go out and the cash flow has to be there to cover them. If you look at profit - that money which is left over after cost of doing business, payroll, and overhead - THAT is spendable money for capital improvement, investment, raises, or other needs. I have worked for people that did not keep a ledger. They simply called the bank to find out their balance and assumed that that was the amount of money they could spend. These people could not be bigger fools because they never take into account outstanding checks, upcoming expenses, payroll, or taxes. What would happen if some unexpected expense were to arise? I set up a good bookkeeping system where we always knew what was in the bank, where it had come in from, what bills were outstanding and when they were due, plus estimated yearly cost of maintenance and repair, estimated property and equipment taxes, capital improvements - basically a one-year plan. Then the business man could tell what he had that was "spendable" money. You will either become buried in debt or not be in business at all if you do not know how much it costs to run your company or maintain adequate cash flow to pay your expenses on time. With a little forethought and planning, you can come up with a one-year plan and even forecast costs further into the future. Then, by tracking performance, you can adjust your plan accordingly. Operating in the dark is a scary thing. Plan and operating with a light shining on your financial picture, differentiat ing the different funds you hold and their purpose and you will operate in a clear, well-planned manner. A good bookkeeper or accountant can set up a system that can easily be maintained by your office to do business in this enlightened manner and the cost is well worth it if you do not understand accounting yourself. |