Cash flow: (noun) the total amount of money being transferred into and out of a business, especially as affecting liquidity.
E-commerce businesses worry a lot about bringing in the profit, but forget the importance of good cash flow. You may have concluded a good sale and made more than you spent, but unless that money is in hand at the right time you technically don’t have a profit. Simply put, if your money circulation is stunted, stuck or steamed, you can’t expect it to lubricate the wheels of your business properly. How then will you run the business?
To drive home the point, let’s look at the bad things about profit (yes, you read right; from this perspective it has a disadvantageous facet). Because income statements don’t reflect your complete current standing.
Do you see how misinforming it can be?!
It’s all in the timing. A profitable business may be unable to pay its bills, and a business that meets all its financial obligations may not be profitable. You may be profitable over a few months but are you profitable in a day or week? Were you able to run the operation of the business?
For instance, with cheques, technically, you need to account for this money as debited so that you don’t make transactions higher than the actual cash balance left over; however, your bank statement will not reflect this until the receiver encashes the cheque, which they may have chosen not to do immediately or even within the month since receiving it.
(aka managing day-to-day cash flows and not doing monthly tasks annually)
Book-keeping well done means a tidy record of all your transactions, a track of invoices, due or late payments, and an understanding of where your money stands. If done properly, you can generate accurate business reports which in turn help you understand your cash flow and helps you make better financial decisions, and lubricates the entire accounting process till tax day.
Paper trails don’t belong in a dusty shoe-box above a dusty cabinet. And the latter can’t fit 7 years’ worth of filing (which are the records you must maintain). You need to have a proper system to track bills, invoices, cash flow, and other monetary obligations or you won’t have a clue where it all went when you need to start filing taxes.
The most elementary necessity of doing accounts and doing them right is to understand how much money you had, how much you have and how much you will have. Daily cash reports are important to understand how much you can spend without running deeply into credit or debit each week. Additionally it gives you vital data on profit, loss and the possibility to expand.
Each week’s demands vary, so there is no fool-proof method of predicting a penny-for-penny cash flow. However, each week’s demands can’t vary so wildly that you can’t foresee to an extent the expenses you will incur. You know what your scene was this week; use that experience to plan and budget better for the following one.
So make sure that good cash flow is a top priority with your e-commerce business!
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