Nearly 20% of businesses will fail within their first year, and less than half make it to ten years.
One of the most common reasons many businesses fail is cash flow problems. Many startups run out of cash or cannot raise new capital to sustain their business.
But managing cash flows and having a solid financial plan are sure ways to help your business succeed. Continue reading as we explore “The Importance of Bookkeeping and Managing Cash Flows”
- 1 What Is Cash Flow?
- 2 What Is Bookkeeping?
- 3 The Importance of Bookkeeping and Managing Cash Flows
- 4 Benefits of Managing Cash Flows and Bookkeeping
- 5 How to Manage Cash Flow
- 6 Allow Your Business to Succeed
What Is Cash Flow?
Cash flow measures how much net cash flows in and out of a company during a set period.
Positive cash flow means more cash is coming in than leaving the business. As a result, the company can pay its liabilities, like bills and other expenses. Yet, positive cash flow isn’t the same as profit or growth.
There are three types of cash flow activities. They are:
Often, small businesses have positive cash flow in one area but negative cash flow in another.
Negative cash flow means the business cannot afford its payments. However, negative cash flow doesn’t mean you’re operating at a loss. Instead, it shows your expenses are more than your income for the set period.
If your business has negative cash flow, you want to get it back to equal or positive cash flow as fast as possible.
Cash flow is an excellent indicator of a business’s financial health. Long-term negative cash flow indicates that your business isn’t doing well to lenders and investors. This will make it hard to get bank loans or investments, should you want them.
What Is Bookkeeping?
Bookkeeping is the practice of recording cash flow. You record all financial transactions (expenses and income), such as:
- Material expenses
- Services expenses
- Customer payments
Bookkeeping was a tedious task in the past because businesses had to record every transaction physically. Before bookkeeping software was available, companies had to manually track their finances either on paper or using a program like Microsoft Excel.
But now, it’s easy for businesses to outsource bookkeeping to an online bookkeeper or use bookkeeping software.
The Importance of Bookkeeping and Managing Cash Flows
Financial management comes down to cash. In fact, cash flow management is the foundation of business finances.
Your business needs cash on hand to continue its operations. Managing cash flow tells you when your business will have cash, and helps you get more money, faster.
To manage cash flow, you need bookkeeping. Bookkeeping supplies your business with income statements, balance sheets, and cash flow statements so that you can see all your financial data.
An accountant can analyze this data to help your business improve spending and cut costs, thus increasing business profitability and productivity.
Yet while bookkeeping is essential for financial management, it’s also necessary for legal management.
Should your business receive an IRS tax audit or a state tax audit, you can respond accordingly without fear. Companies should always follow tax compliance to avoid future problems.
Benefits of Managing Cash Flows and Bookkeeping
It’s not enough to know the importance of managing cash flows and bookkeeping. Understanding the benefits of these practices will show you exactly why you need to instill them into your everyday business practices.
Take a look.
Accurate Budgeting and Strategic Planning
Cash flow management tracks business spending, so you don’t run out of cash.
Creating a budget is much easier when you can clearly see your business’s income and expenses. Your budget is the financial roadmap of your business. It allows you to plan for future costs and grow.
Without accurate financial data, you can’t create a proper budget. This can cause your business to overspend.
Accurate records can also come in handy when there are discrepancies between:
Further, you can use financial statements to identify which products or services bring the most revenue to your company. You can invest more in your top offerings to drive up profit.
At the same time, you can see which products or services are costing your business more money than they’re bringing in. Then, you can make informed decisions on which offerings to discontinue and where to cut unnecessary expenses.
The bottom line for any business is to increase growth and profits, which is only possible with accurate financial data. Then, as a business owner, you can use this data to focus on creating a long-term business plan.
Although you may feel overwhelmed when starting your business, you need to plan for the future strategically, or else you won’t succeed.
If you want to attract investors to your business, you must have accurate and organized financial data. No investor will give you money without it.
The same is true when talking to lenders about taking out a business loan. Lenders ask for detailed financial information to understand a business’s profitability before extending a loan to anyone.
Bookkeeping provides up-to-date information both investors and lenders require. Moreover, it can be the deciding factor whether your business gets the money or not because the data shows where your business is headed (financially).
Taxes, Taxes, Taxes
As mentioned, bookkeeping is essential for tax compliance. Even if you follow all regulations, it’s still possible for the IRS to audit you. Although most businesses never face an audit, if you do, bookkeeping ensures you can quickly answer any questions the IRS has about:
- Tax deductions
- Tax returns
- And more
When it comes to filing your taxes, with organized and accurate data, you won’t be scrambling to put your financial statements together each year.
Think about the stress of needing to calculate a year’s worth of finances in one or two months. That sounds hectic. But bookkeeping is constantly tracking business finances. So all you have to do during tax season is collect your documents.
You’ll also be able to see where you have write-offs to lower your tax bill. The IRS offers businesses several ways to reduce their tax responsibility, which can save you money if you file your taxes correctly.
The Biggest Benefit of All: Peace of Mind
Peace of mind may not sound like it’s important. But running a business is hard enough without worrying about how you’re going to manage all your expenses. Unfortunately, most business owners aren’t financial experts, making financial management that much harder.
When you take bookkeeping seriously and manage your cash flow, you know that your business can continue operating daily, even when it faces challenges. Having accurate financial data allows you to make decisions for your business confidently.
You don’t have to take bookkeeping into your own hands. Most small businesses outsource this service to a professional or use bookkeeping software.
The cost is well worth it for the benefits.
You can rest easy knowing that your financial information is in order, organized, and always available at a moment’s notice, should you need it. From a dispute to an IRS audit, your business is prepared to handle any financial hurdle in its way.
How to Manage Cash Flow
Bookkeeping is only the first step in managing cash flow. Of course, it’s the best way to understand all the financial transactions pertaining to your business.
The next step is to create cash flow statements. You can calculate cash flow yourself using spreadsheets, but it’s easier to use software or hire an accountant to do it for you. An accountant’s job is to analyze your financial data, so it’s recommended to hire one if you can afford it.
Analyzing your data helps you understand how cash is moving through your business. Plus, you can use flow statements to make projections and analyze how your decisions impact the future financial health of your company.
If you need to increase cash flow, you’ll know by looking at the data. You don’t want to rely on a credit card or line of credit long-term. This will result in negative cash flow and could bankrupt your company.
Additionally, cut spending. Overspending happens when you’re paying unnecessary expenses or paying for costs at the wrong time. There are several ways to maximize your budget by paying less for the services you need.
For example, you can negotiate lower prices with suppliers using industry benchmarks.
When you reduce overspending, you increase cash flow.
It’s also best to speed up your accounts receivable. Businesses often have to wait for payments from clients or deposits from payment processors. The quicker your company gets that money, the more cash flow it’ll have.
Finally, continue to analyze the financial data. It should be routine for you to review statements because the more you do so, the better you’ll get at finding ways to increase cash flow.
Allow Your Business to Succeed
If your business is managing cash flows via bookkeeping, it’s much more likely to succeed. Don’t let the financial side of business be the reason you fail, and seek out professional financial assistance if you need it.
Now that you have learned, “The Importance of Bookkeeping and Managing Cash Flows”, Do you Want to know more about all things business? Head over to the Business section. We add new content regularly for business owners, so make sure you bookmark the page for future reference.