Accounting practices haven’t changed much through the decades. Sure, technology has changed some of the processing aspects, but generally accepted accounting practices (GAAP) have remained comfortably constant. And all factors indicate, that will hold true for decades to come.
Fun fact: A lot of what we know about commerce throughout history is due to accounting records. Accounting records have been discovered dating back more than 7,000 years and the basis of the double-entry bookkeeping system that we use today was created in early medieval times.
A Word about Cash Flow
While cash flow has always been an important aspect of accounting, the statement of cash flows is relatively new when compared to other statements. It only became widely adopted, and required, in the late 80s.
Many business owners tend to skate over the statement of cash flows for the far more exciting income statement (or P&L).
This is a mistake!
The cash flow of your business is what tells you if you will be able to pay your bills next month. Making sure that you have a positive cash flow can be the difference between a successful business and one that flounders.
Here are the 3 most important things to know about your cash flow and how to manage it.
Statement of Cash Flows
The Statement of Cash Flows, [SOCF for short] is one of the 3 main financial statements you – and every small business owner – should be reviewing on a regular basis.
It shows you the changes in your cash over a specific period of time, usually a month or quarter. The SOCF essentially shows you how much cash you have available at a given moment.
Here is a more in-depth post about the SOCF if you need it. I recommend that you work with your bookkeeper to make sure that you’re getting all the information available in this statement.
For the purpose of this article, just know that you should become best friends with your SOCF.
Accounts Receivable
So you’ve provided a service for your customer and sent out the invoice. The income has been recorded and the people rejoice!
But not quite.
Until you get paid, you need to keep an eye on those invoices. It’s important to know what percentage of your invoices don’t get paid on average. There are always those that don’t pay, but there are many ways that you can increase the likelihood of payments.
The best way is to develop a follow up process that covers when and how often you “remind” them that their payment is due. If it’s a larger company, make sure you find out who to contact and the best number for reaching them – in advance of invoicing them. (In other words, before the invoice is past due.) These are always unpleasant conversations, but they are best done by phone rather than sending out emails that are too easy to ignore.
Review expenses
Do you know where your money is going? You need to have a firm grasp on your expenses in order to maintain a positive cash flow.
Not a cent should leave your account unless it’s necessary and valid. Make sure that you are reviewing all your expenses on a regular basis to verify that you’re not paying anything unnecessarily.
Automatic, electronic payments for recurring expenses can be helpful so you know that they are being paid on time, but it is also really easy to let things slide. You may not notice $5 leaving your account every month for a service you’re not using, but that money can really add up over time, especially if there’s more than one.
Bottom line:
Understanding cash flow isn’t glamorous (unless you’re a bookkeeper like me). But it is a vital aspect of running your business. Keeping your books up to date and verifying their accuracy is the foundation of your business’ financial health.
If you accept its importance but realize it’s beyond your ability to do well (or at all), this might be the time to explore bringing in a professional to handle this for you. I’d be happy to discuss if, how, and when Still Waters Bookkeeping services could manage your cash flow, accounts receivable and expenses while you manage your business.