Contractor Accounting: Cash Flows
Tuesday, October 23, 2007
This is part of a series called Contractor Accounting 101:We've discussed two important financial statements for small businesses - the income statement and balance sheet. Another important analytical tool is the Cash Flow Statement. It shows how well your business can pay its bills.
Your Cash Flow Statement indicates money coming in and going out over a period of time. Make sure you look at cash flow every month or at least every quarter. Cash flow can be from normal day-to-day operations, investing or financing activities.
These activities include cash coming in from a completed job, going out for supplies, payments on credit cards, or interest received from a savings account. It can be money in from the sale of equipment or out for the purchase of a showroom. This statement is not a calculation of profit but shows how much money you start with, how much comes in, how much goes out, and how much you're left with at the end of the period.
Say you start January with $25,000. You have $12,000 coming in from sales, $3,000 from what previous customers owe, and $5,000 from the sale of a vehicle. You plan to have $15,000 of cash coming in for January. However, you'll be paying $1,000 in rent, a $500 truck payment, $6,500 in payroll, and $10,000 in products. You'll also have an owner withdrawal of $3,000. You'll have $21,000 in cash going out for the month of January.
Your change of cash will be "- $6,000" ($15,000 cash in subtracted by $21,000 cash out.) Obviously, it's important to maintain positive cash flow. But it shows you'll need additional sales for the month or a cut in expenses (reducing payroll or purchases.) Your ending monthly balance will be $19,000 ($25,000 beg. balance minus $6,000 cash flow change.) That ending balance will be your beginning balance for February.
RELATED POSTS:
Contractor Accounting: An Introduction
Cash Accounting vs. Accrual
The Accounting Equation
Types of Accounts
Financial Statements
Labels: Accounting
