Are you having trouble keeping track of your cash flow? You’re not alone. Most small businesses have a hard time staying on top of their finances. But don’t worry; you can get your business back on track with some understanding of accounting and cash flow.
This article will discuss the basics of accounting and cash flow and the two most common accounting methodologies: cash basis accounting and accrual accounting. We’ll also provide tips for staying on top of your finances and improving your business’s cash flow.
Understanding Cash Flow
Cash flow is the movement of money into and out of your business. It’s essential to track your cash flow to see where your money is going and how it’s being used. There are two types of cash flow:
- Operational Cash Flow: This cash flows daily in and out of your business. It includes revenue from sales, expenses for supplies and payroll, and payments for debts and loans.
- Investment Cash Flow: This cash flows into or out of your business due to investments or other long-term financial decisions. It includes selling assets, taking out loans, or investing in new businesses.
Knowing the difference between these two types of cash flow is vital for understanding how your business is performing. Operational cash flow is a good indicator of your business’s day-to-day financial health, while investment cash flow can give you insights into your long-term financial planning.
There are several ways to track your cash flow.
- The most common method is to use accounting software like QuickBooks or FreshBooks.
- You can also use a spreadsheet to track your cash flow manually.
Whichever method you choose, be sure to update it regularly so that you always have an accurate picture of your business’s finances.
Understanding Accounting Methodology
Now that you understand cash flow let’s talk about accounting methodology. This is the process that businesses use to track and record their financial transactions. There are two main accounting methodologies: cash basis accounting and accrual accounting.
Cash Basis Accounting
Cash basis accounting is the more simple of the two accounting methodologies. Cash basis accounting only recognizes revenue and expenses when they are paid out or received in cash. If you have invoiced a client but haven’t received payment yet, that income won’t be recognized until the cash is in hand. This accounting method is best for businesses with simple financial transactions.
Accrual Accounting
Accrual accounting is a more complex accounting methodology that recognizes revenue and expenses when they are incurred, regardless of when the cash is paid out or received. The income will still be recognized on your books if you have invoiced a client but haven’t received payment. This accounting method is best for businesses with more complex financial transactions.
Most businesses use accrual accounting because it provides a more accurate picture of your business’s financial health. However, cash basis accounting is more straightforward and may be a better option for small businesses or businesses with simple financial transactions.
Tips for Improving Cash Flow
Now that you understand cash flow and accounting methodologies let’s talk about ways to improve your business’s cash flow with these accounting tips.
- Review your invoicing and billing procedures: Ensure you’re invoicing customers promptly and giving them clear instructions for making payments. You may also want to consider offering discounts for early payments.
- Keep track of expenses: Review your business expenses regularly to ensure you’re not spending more than you need to. Look for ways to cut unnecessary costs, such as subscriptions or memberships you no longer use.
- Make payments on time: Pay your suppliers and creditors on time to avoid late fees and interest charges. This will also help improve your business’s credit rating.
- Offer flexible payment terms: Give your customers the option to pay in installments or over a more extended time. This can help them afford larger purchases and make them more likely to pay you back.
- Stay organized: Keep good financial records to easily track your income and expenses. This will help you identify areas where you can save money or make changes to improve your cash flow.
Following these accounting tips can improve your business’s cash flow and keep better track of your finances.