The word in business is profit. The word is easy to understand. The companies will be considered successful if they generate profit. Equate for small businesses, but not the profits are not necessarily healthy cash flow, or even success.
The accounting definition of profit is revenue (including credit sales), net of expenses. The supervision of the most important aspects of the "profitability", leading to numerous problems for companies owners.The problem with accounting is inevitable that the assets acquired is cash,on the balance sheet and inflate profits artificially, by the same amount that the asset was purchased for.
Charged credit sales are recorded in journals and sales), a corresponding debit (debtor, is increased for the credit sales. Value added tax or general sales tax paid on these accounts, as it is processed.
One of the largest deficits in small enterprises is the lack of credit control. Many entrepreneurs do not have the ability to collect outstanding debts. Where tax or GST haswere calculated, they will pay, regardless of whether the debtor bill was paid or not. Businesses also pay taxes on profits.
Business owners (on the advice of their accountants) are profit-driven and not cash flow. This leads to certain interpretations of their finances. If the assets), liabilities (solvency, current assets exceed current liabilities exceed) (liquidity, they happy. Business owner the amount available on their overdraft or credit facility as a business-CASHAVAILABLE! There is no available cash, but debt!
Solvency or liquidity should be measured by the cash amount available (bank and cash on hand), more than liabilities. All other assets should be excluded. The reason is that the assets could be sold far below their market value if the company had to be liquidated. Cash is the only good that can be used without any cost or loss on the conversion.
What about the cash flow statement? The cash flow statement is not mandatory forsmall businesses, but so far is an important tool for analyzing the cash flow of the company. Many tax authorities will accept only the income and expenses into account. But the cash flow statement has its flaws. Loans are advanced play as "cash flow from financing activity" which causes the illusion that the "healthy bank balance" means that the company is healthy. In an environment of high interest rates of the loan can be risky, and this aspect has to be considered in the report. A reference to theFinancial statements, is not sufficient.
Many accountants can not agree with the above. But you my firm conviction that a sound cash management, it is small in most companies. Accounting statements should be used only for tax and statutory purposes.
A cash flow business would be as follows:
* Collect outstanding debts as soon as possible (the most difficult and problematic, I agree)
* Significant cash deposits from customers before the start ofBeginning of a project
* Bank of cash immediately, since cash is lost or very fast output
* Stable creditors, as long as possible
* Start investing 5 to 10% of the cash received in a given month, in another bank savings accounts
* These bank accounts is also known as reserves can be called:
a) A building fund (for future expansion)
b) A Tax Fund, and finally, a contingency fund (occurring all emergencies). These reserves can be enhanced by additional revenues,The value of credit card payments that have been paid. (Would not hurt, since you used to the monthly credit card payments)
* In addition to the cash spending to no expense, from the wages, the funds for the "reserve accounts should be repealed"
* The benefits of the reserve will account are two fold, 1) A buffer between income and expenses (will exert pressure on the overhead / spend less), and 2) The transaction is successively capital reserves that the company would havehad to source from somewhere else, if arose.The the need for reserves would grow quickly if they remain intact, that is for twelve months. This exercise requires discipline, so that it works.
Focus will be on the cash and savings to ensure a prompt (almost magical), growth of money! The company will also be less dependent on loans, credit and capital from outside.
