Business owners make their spending decisions based on the business bank account balance. If the cash isn’t there a line of credit comes in handy.
In small businesses, accounting is often not up to date. Reconciliations are not done. It is easy to run a business this way. This method of operation can lead to financial failure.
Cash Flow Control is the most important aspect of running a business. Cash Flow is the life-blood of a business.
So, what is the difference between profit and cash flow?
- Profit is the amount of money left after paying all expenses.
- Cash flow is the net flow of cash in and out of the business.
Both profit and cash flow are important. For example, a business can be profitable but have a negative cash flow. Or, a business could have a positive cash flow and not make a profit.
Running out of cash can cause business failure faster than other causes. So, don’t make the mistake of managing your business based on your bank balance.
Business owners see growth as a solution to a cash flow problem. But, growth without a plan will lead to more cash flow problems. Increased sales may only increase accounts receivable and not an increase in cash. Increased accounts receivable may be great. But, you can’t pay employees or suppliers with accounts receivable.
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