A company’s ability to consistently generate positive cash flows from its daily business operations is the lifeblood of a business and critical to its sustainability and future growth. Small businesses are hugely dependent on their cash flow. Strict practices or policies of accounting for small businesses will assist in understanding the cash flow and subsequent implications. Understanding cash flow is connected to all reported financial statements.
What is Cash Flow?
Cash flow is revenue or expense stream that changes a cash account over a given period. Financing, operations or investing draws positive cash flow. Expenses or investments draw cash outward from a business. An imbalance of cash out to cash in creates a negative cash flow and can lead to a business struggling. Accounting for small businesses identifies this cash flow through an accounting statement called the “statement of cash flows”; this shows the amount of cash generated and used by a company in a given period. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow is often used as an indication of a company’s financial strength. It is essential for a business to be able to pay creditors and employees and any other immediate expenses.
Forecasting
While stability of a small business is entwined in the managing of cash flow, risk is also associated with the volatility of earnings. Addressing policies for accounting for small businesses around cash flow has to do with forecasting and tracking on a regular basis. Once learned, forecasting can help small business owners smooth out the regular ups and downs that all companies experience as a normal course of business. In fact the firm’s financial statements and the forecast of future revenues and expenses are some of the most valuable management tools that small business owners have at their disposal.
One suggestion for undertaking accounting for small businesses is rather than focusing on an annual sales figure, to focus on a more realistic monthly incomes/expense statement. You can then create longer term forecasts based on the medium or average monthly statement as well as optimistic growth. Effective accounting for small business practices also focuses on creating budgets – forecasting is a key component of this. Forecasting can help make strategic decisions such as when to introduce a new product; how to identify the best time of year for you or your employees to take a vacation; and how to calculate how profitable the boom time must be for the business to survive a slump.
Every small business wants to be successful. At the end of the fiscal year, they want to see a positive in their books – a big part of creating this positive is having a clear understanding of the revenue and expenses of your business and in trying to create consistency and stability with respect to the cash flow. The value of a business, the measure of its strength, profitability and longevity is clearly attached to the understanding of cash flow that arises from effective accounting for small business practices.
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