You opened your own business, and now you wake up at night to assorted horrors about cash gaps, because you are barely making ends meet? Tried everything, and no sleeping pill helps? If that sounds familiar — or if you would rather never end up in that entrepreneur’s shoes — let us deal with the cause instead of trying to mask it.
Everyone knows there are reports for analysing a business, but how do you work out which ones you actually need? It is simpler than it looks: financial accounting has only a couple of core reports that show the real picture of how a business is developing — the Cash Flow statement and the profit and loss statement (P&L).
Let us go through each of them properly.
Cash Flow — the statement of cash movement
The cash flow statement is used to keep control of every inflow and outflow of the company’s money.
With it you can see, at any moment, the balances on the company’s accounts for whatever period you need, and use that information to analyse and plan future spending. This matters because cash is a limited resource: every payment needs a priority and a place in the queue if you want to avoid those cash gaps.
When you need Cash Flow
Suppose “Our Company” wins a manufacturing order on payment terms of 60 days after shipment. To produce it we have to buy raw materials and components, and those have to be paid for within 30 days.
The deal closes successfully. “Our Company” makes and delivers the order. Now it is time to pay for the raw materials, because the payment deadline falls earlier than the money actually arrives. And that is where “Our Company” hits a cash gap.
Cash movement always has to be planned, and money has to be managed. That is what keeps unexpected situations and cash gaps away.
The situation could have been avoided with a cash flow report. It would have shown that “Our Company” was heading for a negative cash balance, and the payment terms of the order would have been revisited in time.
P&L — the profit and loss statement
Now let us look at why the profit and loss statement is so useful and how to read it correctly.
The P&L shows the difference between revenue earned and costs incurred over a given period. Put simply, it is a table made of two main blocks: “Income” and “Expenses”.
Once every income and expense item is posted, you can tell whether the business is profitable or loss-making.
The income side reflects every operation that increases economic benefit — money or assets coming in. It is clearest and most useful when income is broken down by item: by line of business, by product group, by counterparty, and so on.
Do not forget that refunds can occur during the month. Those are simply subtracted from income. That gives you total income net of refunds and fees.
The expense side reflects the operations that reduce economic benefit. It is broken down into groups by expense type — payroll, depreciation, purchases of consumables, other costs.
Analysing the P&L
Once every income and expense item is posted to the right side of the table, you can determine whether your business is profitable. Subtract total expenses from total income. Now you can draw conclusions and analyse what you are doing, in order to work out your next business strategy.
Making the business easier to run
Cash movement always has to be planned, and money has to be managed. That keeps unexpected situations and cash gaps away — especially since all the information is already there in the Cash Flow and P&L reports.
One thing remains. Rolling out accounting software in a company is always a laborious process — but not with QUINCEFIN, because with us everything stays clear and easy.