Cash in Bank doesn't mean a thing

Many people in business run their business on the basis of how much money is sitting in the bank account.

If there is a lot of cash in the bank, they feel that the business is doing well and if there is a small amount of cash in the bank, then the business is failing to operate to its potential.

The problem is, this is the basis that many business owners use to assess how their business is going.

Business owners need to realise that cash in the bank does not equal profit. You cannot manage your business properly on this basis. Your business will eventually fail if you do not know the difference between cash and profit. Never ignore the difference between the two.

There are 4 things that business owners need to learn:

  1. Bank balance 
    The amount of money you have in the bank is not an indication of how well your business is going.

  2. Bills in drawer 
    Even though your bank balance may appear healthy, there may be a lot of bills sitting in the desk drawer that have not yet been paid. Once those bills are paid, your cash balance will reduce and the business may not appear to be as healthy as you first thought. On the other hand, you may also find that there are invoices for money due to the business that has not yet been collected, and once these are collected the bank balance will improve.

  3. Cash and profit not the same 
    You need to realise the difference between cash in the bank and profit. While cash simply signifies dollars in the bank available for use by the business, profit is to do with not only the dollars in the bank, but also with the true financial position once those dollars are used to pay outstanding bills, and once invoices due to the business for sakes made are received.

  4. Systems needed 
    You will need to have an adequate system in place so that the accurate results of the financial affairs of the business can be extracted at any time. These results enable decisions to be made or directions changed to ensure profitability, or to avoid a financial loss or potential disaster.

The lesson is this - You must have an adequate bookkeeping system in the business, you must have kept adequate records and you must run your business along proper financial and accounting lines so that at any time you can properly extract the right data to calculate whether the business is making a profit or not and if not decide on what to do about it.

© 2005 StartRunGrow

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