Cash flow and profits are not even close to the same things. The money being deposited and withdrawn from a bank account constitutes cash flow and sometimes it is not at all synchronized with profit. Profits may appear on the books but are nowhere to be found as far as cash flow is concerned.

It is very tempting to see this situation as a "godsend" that can spent on anything the business needs or wants. But, you had better taker a closer look before making this choice. The cash is really only the cost of doing business plus the profits realized from conducting that business. Spending the cash without understanding that you still have to cover material and labor costs is a true recipe for
disaster.

If the cash flow arrives before the job is actually done, it may be wise to have a special account to hold this money so that your business account does not seem larger than it is in reality. You or your accountant can then put the money into the correct account so that the cash is not considered
earned before it actually is.

When cash flow comes in significantly before a job is performed, it is a good idea to have a special bank account for holding and tracking these funds so that your business bank account does not appear to be artificially inflated. The accountant can then charge the money to the appropriate account and not consider them monies earned.

The money in your cash flow never seems to have any problems "flowing out", but you have to be careful and make sure it is adequate to cover all of the expenses that arise when doing business. If your cash flow dries up, your company might be dead in the water.

Cash flow, like the name, is very easy to let "flow". But the cash flow coming in has to cover those crucial expenses that go out - maybe sooner, maybe later, but they WILL go out and the cash flow has to be there to cover them.

There are some people like a former boss of mine that refused to keep a ledger for his business. He thought that he could just give the bank a call, ask his balance, and that amount was his to spend on whatever he needed. While this fantasy is nice to believe, it does not take into account that payroll, expenses, bills, and other priorities had to be met with that money and he was literally jeopardizing his business by having this practice.

I couldn't take it any longer and had to set some books up for the company so we could track things better. When it was done, we never had to guess what was in the bank and had a full accounting of all expenses that the business could anticipate dealing with over the course of the next year. It was my "one-year plan" and with it there was never any doubt what was profit and what was cash flow.

You will either become buried in debt or not be in business at all if you do not know how much it costs to run your company or maintain adequate cash flow to pay your expenses on time. With a little forethought and planning, you can come up with a one-year plan and even forecast costs further into the future. Then, by tracking performance, you can adjust your plan accordingly.

You do not want to run your business and not know the true state of your finances. By allocating funds for all expenses, you can run your business in an organized and efficient manner that will ultimately yield you greater profits in the end. You may want to have an accountant or bookkeeper set your books up for you so that you need only post transactions. The order and feeling of control you have when doing so makes it well worth the effort.

About the Author:

Ken Bidgood is the chief writer at Advertising XP, visit there today for the latest Business advice, and their free newsletter is well worth signing up for too. If you want to read more Business articles go to: http://www.advertisingxp.com/articles You can also find out where to get the cheapest, most profitable pay-per-click traffic on the net.

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