What You Need To Know About Cash Flow

Even the most profitable companies can go broke if they fail to manage cash wisely. In running a business, cash is critical and it is not about generating profits. When you think about how much it would cost to make the product and what the company can sell it for, profits will surely come to mind. Profits are not tantamount to cash as  you do not spend them in a business. You spend cash. If you do not have enough cash to pay your expenses, you can put your business at great risk. Your working capital determines your business health. It is important that you have a proper business plan that enables you to become well-prepared in managing your cash and profits.

1. Sales do not determine a steady cash flow.

Even if you are making the sales, it does not necessarily mean that you have the money to pay the expenses you incurred. If you incur the expense, assuming that you have already made a payment for them can get your business into trouble. Inventory is often bought, paid and stored until customers purchase it hence it becomes the cost of sales.

2. Generating profits do not mean you have enough cash.

Bills cannot be paid with profits. Even if you regularly pay your bills and your customers don’t, it can still take its toll on your business. Even if you are making profits, you still cannot make any money from it.

3. Inventory can hurt your cash.

It is important to note that you need to build or buy your product before you can even consider selling it. Even if your products sit on your shelves, the suppliers are still expecting to get paid. This means the dollar you have in inventory is a dollar you do not have in cash.

4. Bankers do not like surprises.

It is necessary for you to plan ahead so you are well-prepared if a problem arises. If you go to the bank armed with a realistic plan and chart, the bank will have an idea of the financial health of your business. If ever you intend to take out a loan, the bankers will use the reports as basis for their decision. `With a steady cash flow, it will not be impossible for you to get an approval from the bank.

Being aware of these cash flow rules will enable you to make room for business growth. Due to the nature of cash flow, you will not grow complacent even if your business is generating profits.

5 Bookkeeping Habits That Make Business Thrive

Your finances must be regularly tracked if you are running a business. Otherwise, you can put your business at serious risk. If you want your business to survive and thrive, it is imperative that you have good bookkeeping habits.

1. Have a professional prepare your tax returns

Business owners are not only focused on one aspect of managing the business. This is why most savvy entrepreneurs choose to outsource work to ensure accurate results. If you have a trained financial eye, bookkeeping processes can be easily monitored. If there are discrepancies, bookkeeping experts can correct or improve the data before it reaches you. Preparing tax returns on your own may not be a good idea. It is because there are technicalities that you might not be fully aware of.

2. Document bookkeeping processes

It is also a good habit to document your processes. This way, you will be able to gain a better understanding how bookkeeping processes should run. As your business grows, you will also be able to prevent confusion as everyone is in the same direction. Good bookkeeping should be consistent.

3. Choose the right software

Never skimp on the bookkeeping program you are going to use because it can help you get things done in an accurate and timely manner. In choosing the right software, you should focus on your business needs. Sophisticated software that is not aligned with your business objectives will be a waste of money. Ask for recommendations and get ample training before deploying the new system.

4. Keep an eye on your reports

Although you need to hire a bookkeeper and accountant for your financial reports, this does not necessarily mean you should go entirely hands off. You still have to keep yourself involved by reviewing reports and checking what is going on with your business. You need to have basic understanding of business numbers including trend in expenses, profit, profit per customer, accounts receivable and many others. Knowing the basics of accounting can help you monitor the health of your business.

5. Keep receipts

You need to know how much you are spending on your business and keeping receipts should be considered a habit. If you are not mindful with your cash expenses, it is easy to get confused with business numbers. Receipts serve as your backup statement. Some business owners may even keep a notebook to log cash expenses they incur. You can also download accounting app which enables you to snap pictures of your receipts so you do not have to keep the paper copies.

What Are Considered Good Bookkeeping Practices

When it comes to running your business successfully, you need to incorporate good bookkeeping practices, which should be completed regularly. These practices are going to help you identify and fix problems before they take a toll on your business.  When these practices are followed on a regular basis, they become a habit and soon you will notice that your tasks are getting easier as you master these practices. The last thing that business owners want to do is worry about their bookkeeping practices. For those who have just started a small business, bookkeeping seems like a new concept and it may take time before you get a grasp of the bookkeeping practices. However, when you know why good bookkeeping practices must be followed, you will make it a point to incorporate them in your business.

The benefits of good bookkeeping practices:

•    Monitor the failure and success of your business regularly. Without following good bookkeeping practices, you can always make yourself believe that your business is still doing well. However, you will realise the importance of bookkeeping when you discover that your business is not doing good. Bookkeeping allows you to obtain timely and accurate information. You will know if your sales are increasing faster or if the expenses are too high based on your sales level. You will also have an idea if your expenditures do not appear as expected.

•    Make sound financial decisions. A bookkeeper can give you recommendations based on what they see on the financial report. Before a decision can be made, evaluating the financial consequences must be kept in mind. You will never know the financial impact of a course of action that a bookkeeper provides if you do not have a financial report. A financial report tells you where your business is headed. Is it time to hire another salesperson? Do you have a profitable product line?

•    Bookkeeping procedures are put in place. Before you obtain bank financing, a banker needs to see your financial statements including the cash flow budget, balance sheet and income statement. These statements can create an impact on your requested loan. You will also have to prepare your bookkeeping documents and procedures so the bank can verify if you are running your business in a professional manner.

•    Prepare an accurate tax return. Every business is required to file an income tax return and make timely payments of income taxes. Good records are essential in preparing your tax return and it also allows you to provide accurate information. When you have poor records, your business will have the tendency to overpay or underpay taxes. Good recordkeeping can help prevent chaos in bookkeeping.

•    Obtain other sources of capital. If your business is expanding, you need a partner that can help you with expansion. A prospective business partner wants to take a look at the status of your business and being familiar with the financial picture is one way for them to gauge if you make a good business partner. Suppliers and creditors will also require your financial records because they can use them as basis for identifying your credibility as a borrower. These sources of capital are less likely to put their trust in you if you have poor financial records.