As a business owner it is your job to understand the true health of your business at all times. And if you can’t explain your cash flow using hard numbers, you don’t have the knowledge necessary to run your business effectively. The most profitable businesses have systems in place to ensure they understand how healthy their cash flow is at all given times. You have healthy cash flow when your company’s profit is the priority, your expenses are controlled and your stakeholders are updated regularly on your company’s progress.
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Here are five ways to keep better track of how healthy your cash flow is:
- Review Your Chart Of Accounts Regularly
You should be reviewing and updating your business chart of accounts at least once a month. This will help to ensure your financial statements are accurate. It is also necessary to make sure you separate assets into long-term and current categories on your balance sheet and to separate operating income from non-operating income on your income statement. Each expense and revenue account should also include a specific description and never label any expense account as “miscellaneous.” Clearly defining all of the information within your chart of accounts will help you make better business decisions.
- Automate Whenever Possible
If you aren’t currently using accounting software (such as QuickBooks) that automatically syncs your credit card activity and bank account information with your accounting records, you need to make it a top priority to begin using one. Automation will not only make your records more accurate, but it will also save you a tremendous amount of time on data entry.
- Use Accrual Accounting
When you keep your chart of accounts up to date it allows your company to use accrual accounting to track profit and expenses. The accrual accounting method records expenses right when they are incurred and posts revenue when it is earned. This accounting method is far more accurate and will help your management team make better decisions.
- Use Variance Analysis
All businesses should use a process called variance analysis that compares your budgeted amounts to actual results each month. Taking the time to use this process will help you stay on track financially and will give you a much better idea of how healthy your cash flow is.
- Review Your Profit Margin
Regularly reviewing your profit margin is another key to knowing how healthy your cash flow is. Your business’s profit margin is your net income divided by your total sales, and the resulting ratio will tell you how much profit is earned for each dollar of sales. It is generally recommended that you review your profit margin at least quarterly.