Understanding Cash Flow
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The document explains the importance of understanding cash flow in a business, emphasizing the need for entrepreneurs to engage actively with their financial matters, even if they hire accountants. It advises regular meetings with accountants to review finances and ask questions about income and expenses while also suggesting the use of auditors for accuracy. Ultimately, the document stresses that while business owners can delegate tasks, they must still take responsibility for their company's financial health.
Understanding Cash Flow
- 3. Remember when we were young and our parents gave us allowances? It’s surprising how prudent some of us were with our money. For every penny I spent on candy, I made sure to save a dime. Eventually I ended up with enough money to buy myself a book or a game console. In layman’s terms, cash flow is simply defined as the entry and exit of money into your business accounts. The amount of money you make ultimately goes into your utilities expenses, employee’s wages, office supplies, resources and miscellaneous expenses. When your profits are to the right of your “greater than” equation, you have a problem. To the best of our abilities, we try not to get involved in the accounting side of the business because numbers give us a bad migraine. We hire an accountant, and that’s one of the best decisions we made in our adult lives. Just one caveat: As a boss, the prerogative is yours to delegate work to your employees, and rightly so. However, it doesn’t mean you can now wash your hands of all matters. You will still need to be as involved in all areas of your business as you can be. You don’t have to do the heavy lifting, but you have to leave your footstep imprints. You will still need to take on a supervisory role in all affairs of your business. How can you be involved in your business’s accounting matters?
- 4. First, make it a priority to meet with your accountants on a weekly basis. Review the numbers and make sure you know how the money is being moved around. What do the numbers mean? Accountants don’t have a habit of making emoticons and leaving smiley faces on their spreadsheets, so you need to continually ask questions. “Should I be worried?” “Does this loss of money require my attention?” “How did the profits come about?” Make sure you concentrate on both losses and profits, ingoing and outgoing of funds. Understand your company’s finances inside out. Ask your accountant how well your business is holding up. You need to know if your business can enjoy a long lifespan based on the current numbers they’re crunching. With this information, formulate new plans. Consult your accountant on cost cutting means if you’re low on resources. Where are you spending your money unnecessarily? If you’re making money, how can you better invest this money? What can you do if your business is not hitting the numbers that it should be?
- 5. Despite their disguises as number geniuses, accountants are only human, and they are prone to errors. Mistyping 9 and 0 is not an uncommon human error. That is why, to be on the safe side, you need to engage the services of an auditor. The auditor checks the work of the accountant, making sure the numbers tally and the figures are impeccable. And who is going to check the work of the auditor? Why, it’s you, of course! The perk of being a boss is that you don’t have to worry yourself about the process, but the end result is your responsibility. You don’t hear failed entrepreneurs going around and blaming their accountants for their downfall, do you? Ask any entrepreneur and they will tell you that tax season is the second worst. Recession holds the reigning title of being the worst. It’s during tax season that business owners are troubled by a barrage of questions. Raise questions during your meetings with the accounting professionals. Instead of just taking the information at face value, try and learn the various accounting terms and concepts from them. After all, you pay them good money, so why not let your meetings be a learning curve too?
- 6. This doesn’t mean your hourly weekly meetings have now turned you into an accounting guru. You will still need the expertise of these professionals. It’s just that learning from them helps you to understand better, and you can assess your cash flow situation more accurately.