Cash Flow Accounting 101 For Small Businesses | Behalf

By December 7, 2016Business Cash Flow
Cash flow accounting 101 for small businesses

Like many small business owners, you may not have majored in Accounting in college. No matter how much you may have avoided this academic discipline, there is no way to run a successful business without catching up on basic cash flow accounting principles. Below is a summary of cash flow accounting concepts that are fundamental to understanding your business needs, along with brief and simple explanations of how they interact. Incorporating these cash flow accounting methods into your financial planning will help you visualize the past, present, and future of your business performance so you can optimize your cash flow.

1. Financial Forecast

Expectation setting is at the heart and soul of business management and cash flow accounting. An effective financial forecast estimates future results, taking expected business conditions and expected courses of action into account. In order to effectively forecast, you will first analyze your business’ previous financial statements and its current financial state, then secondly form assumptions of how you believe it will perform in the future. In the end, you will have an educated hypothesis that will become an integral part of your financial business plan.

2. Financial Projection

Besides forecasting, a financial projection is another cash flow accounting concept. Projections estimate your business’ future financial position based on hypothetical assumptions. Though projections are often confused with forecasts, the key difference between these two cash flow accounting terms is that projections are hypotheses based on hypothetical situations and forecasts are hypotheses based on expectations. For example, a projection might be based on a potential election outcome; a new Trade regulation; or an environmental factor.

3. Budget

Developing a budget is the next natural step in your financial planning process, after your projections or forecasts are made, in understanding your business’ cash flow accounting. Create a budget that distributes funds across the company, based on both the costs and investment opportunities highlighted during your projection and forecasting processes. Be sure to include an adequate line item for unforeseen costs, as every business encounters surprises each year. In cash flow accounting, a budget is often referred to as “The Plan,” as this is where all the hypothetical analysis comes together into marching orders for the year ahead.

4. Budget Report

Now that you have assessed the future of your business with a prospective financial statement, it is time to compare those results with your current performance. In cash flow accounting, a budget report allows you to contrast the projected amount of money that you will spend with the actual amount you have spent. It is important to note that the budget report is static; it only provides a snapshot of your money within your overall cash flow. Still, it is a good measure of progress for the performance goals that you set around your prospective financial statement.

5. Cash Flow Statement

In order to see how money moves in and out of your company, you will need a cash flow statement. It will provide a detailed breakdown of your business inflows and outflows of money, including your cash reserve, open payables and receivables, money owed, etc. *Note: this statement is based on previous accounting periods.*

6. Cash Flow Budget

Looking towards the future, you will need to develop a cash flow budget. Unlike a traditional budget, your cash flow budget will project future outflows and inflows of cash, like deposits and withdrawals.

At first glance, a Cash Flow Accounting regimen may seem overwhelming. However, your financial forecast and financial projection will together allow you to set goals and get a better sense of where your business is headed. Once these goals are set, you can implement a budget plan and compile a budget report so you can assess your progress at regular intervals. Applying these methods to your business management toolbox will actually control the chaos associated with running a small business, and will make your job easier. To learn more about how your cash moves and your business operates, you will need a detailed cash flow statement or cash flow budget. The bottom line: adopting these cash flow accounting methods allows you to make smarter, more informed business decisions while maintaining accountability for results throughout the year. Inevitably, your business will face unforeseen challenges that can threaten your cash flow. Yet, with a disciplined cash flow accounting focus, failure will not be an option.


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