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 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 labour costs is a true recipe for
disaster.
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.
If someone gives you a large deposit for a job they wanted
you to do for them but then changes their mind before the
job is completed, then it becomes a simple matter to refund
their money out of the holding account. But, if you did not
have that holding account and just put the deposit money
into a normal business account, it is very possible
that you would spend that money and not be able to provide a
refund.
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If the money was set aside in a separate account, it is no
problem to just refund their cash. But, if the money were
just in your regular business account, it might be far more
difficult to refund the money because you very well may have
spent some of it thinking it was yours to spend.
Profit, on the other hand, is whatever is left over after
all the expenses relating to doing business have been
cover. This is the money that you can use to make capital
improvements, investments, and perhaps even raises for your
overworked and dedicated employees!
Profit, on the other hand, is the money earned after all the
expenses of doing business have already been covered.
This money can be used to make capital improvements, give
out raises, or anything else the business may need or want.
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,
differentiating 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.
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About the author:
Ken Bidgood runs a very interesting website at
Advertising XP,
visit there today for the latest Business advice, and
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Read many more interesting articles on Business at:
http://www.advertisingxp.com/articles
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teach you how to get loads of free targeted traffic.
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