These terms usually make potential clients suddenly remember they have a root canal appointment, or some other seemingly less painful activity. Which is unfortunate for two reasons: 1) these concepts are foundational to managing a small business, and 2) they are straightforward once someone takes the time to explain them. So that will be my goal for today’s blog.
Let’s start with cash flow. It’s the simpler one for this reason: it really is just about cash. What comes into your bank account, and what goes out, and how you manage the times in between.
Net income takes a more comprehensive view of how your business is doing over a certain period of time, by recording activity when you become liable to either receive or pay cash. For example, if you sell a service or product, and then write the
customer an invoice that is due in 30 days, the net income approach would show that you have earned some income at the time of sale, not just when the cash is actually received. On the other side, this approach will record an expense when the purchase is made, not when you actually pay the bill (or credit card, if you’re financing it). Accountants call this the “accrual” method,
but we like to have a name for everything.
A common question is: can you have one without the other (or a related question: can’t I just run my business off cash flow and not worry about the net income, since it’s just that accounting stuff anyway)? In a nutshell, that answer is yes – at least
for a little while. If you have some nice cash reserves on hand (either from a bank loan or investments from the owner), it is possible for the business to run for a period of time while having a net loss (more expenses than income).
This happens to most companies when they start, and happened to a lot of companies over the past couple years. However, these two concepts are related, so if you consistently run at a net loss, eventually you will run out of cash also.
So – does this mean you need to become an expert in managing cash flow and net income? No, that’s one of the many reasons you hire an accountant. Should you understand the concepts so that you can understand what your accountant is saying and manage your business more effectively? Without a doubt!
In fact, if you would like assistance developing a further understanding of these concepts in your business, we get excited about doing the detail work to analyze where you are, discuss where you’d like to be, and help set up a plan to get there. Weird –
maybe. All the same, our weirdness could be invaluable for you.
Contacting Vanguard Business Services for your small business accounting and education on this subject is simple, and INEXPENSIVE. Contact us today and see the difference in how we bring the “person” back into “personalized service”!