Believe it or not, you can make a profit and still go out of business.
Let me say it again:
You can make a profit and still go out of business.
Wait, what? How? Why? It makes no sense, right. But this is something all bookkeepers know can be true (and many business owners learn first hand, sadly).
What are some cases this can occur?
By carrying too much debt on the books, for example. Your business may be profitable, but if every spare dime that comes in has to be used to pay off debt, you may not have enough cash to continue.
This is just one example, but as you can see, it’s absolutely essential to monitor and manage cash flow properly. This means you have to look at every dollar that comes in and goes out.
As I’ve said in previous videos, and I’ll reiterate here again: This is also why we cannot analyze the business on a cash basis. We need to be able to see the stuff that is on your statement of cash flows.
So to start, we need to look as your cash flow projections.
Now, there several types of cash flow projections. Many bookkeepers, when asked, will prepare what I call a “check register projection.” These have their place.
If you are in a cash flow crunch and need to quickly figure out how you’ll get through it, then start with your current bank balance, using a check register report. Next, plot out the upcoming cash inflows and outflows that you are certain about. But this type of cash flow projection leaves too much out of the picture.
If you want a good long-range planning tool, you need to project the entirety of the Profit & Loss, the Balance Sheet, and Statement of Cash Flows. I’ve developed a cash flow projections system for this. And, admittedly, it works very well.
In the video above, I show a simple cash flow model that you can use to make sure you have a solid long-term planning tool for your business.