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Managing Your Company's Cash Flow

Article by

Ken Bidgood

Cash flow is an entirely different subject than profit.
Cash flow is defined as the money coming into and going out
of the business bank account.  Sometimes that cash flow will
not be synchronized with the profit.  Perhaps the profit
will show on the books well before or well after the cash
flow occurs.

It is very tempting to see this situation as a "godsend"
that can spent on anything the business needs or wants.
But, you had better taker a closer look before making this
choice.  The cash is really only the cost of doing business
plus the profits realized from conducting that business.
Spending the cash without understanding that you still have
to cover material and labor costs is a true recipe for

If the cash flow arrives before the job is actually done, it
may be wise to have a special account to hold this money so
that your business account does not seem larger than it is
in reality.  You or your accountant can then put the money
into the correct account so that the cash is not considered
earned before it actually is.

When cash flow comes in significantly before a job is
performed, it is a good idea to have a special bank account
for holding and tracking these funds so that your business
bank account does not appear to be artificially inflated.
The accountant can then charge the money to the appropriate
account and not consider them monies earned.

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.

Much like the name implies, cash flow is terribly simple to
just let "flow".  But that money coming into your business
will sooner or later have to cover the expenses necessary to
conduct business.

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 couldn't take it any longer and had to set some books up
for the company so we could track things better.  When it
was done, we never had to guess what was in the bank and
had a full accounting of all expenses that the business
could anticipate dealing with over the course of the next
year.  It was my "one-year plan" and with it there was
never any doubt what was profit and what was cash flow.

A good bookkeeping system takes into account how much money
is in the bank at any given time, what bills are due and
when, all estimated taxes for the year, any potential
capital expenditures--essentially, everything is accounted
for in the upcoming year.  That way, you always know how
much of the money in the bank is actually spendable.

You always have to know the cost of doing business so that
you can pay your obligations on time and avoid going into
debt or even out of business for failure to meet those
obligations on time.  A one-year plan does not take as much
thought or planning as you might think.  Once you have one
in place, it is not a problem to track your predictions and
make modifications to the plan.

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.

About the Author:

Ken Bidgood is the chief writer at
<a href="">Advertising XP</a>,
it's one of the webs most up to date Business sites,
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