Being a business owner in these economic times you’ve most likely already experienced the importance of cash and cash management.  A large portion of businesses and start-ups fail due to the lack of proper cash management and having the available cash to meet commitments.

A tendency of many business owners is to manage their cash by using only the bank account and check register information.  This is good information in that it tells you the amount of cash in your account at that point in time and what checks have been written or what deposits have been made.  However, in managing your cash this information is limited and only a starting point.

Another common tendency is to look at the income statement of your company’s performance and assume the bottom line net income tells you whether you’ve increased or decreased your cash balance.  Because this can be misleading, don’t rely solely on the income statement to budget.  To project cash, you must consider other balance sheet aspects as well.

When using your income statement keep a few cash related items in mind and this will help you better understand how to manage your cash in a more effective way.  The income statement records sale/revenues and expenses, but in most cases, you may have a sale that you get paid for at a later date.  The same with expenses, you may have an expense now, but pay the bill at a later day.  The balance of accounts receivable show the cumulative sales made for which you’ve not been paid.  Likewise, accounts payable show the cumulative bills for which you’ve recorded expense and have not cut a check for.  These balances are shown on the balance sheet.  So, there can be considerable time between the transaction occurring and the time you receive or make payment.

There are other items reflected in the income statement that make it unreliable by itself in reflecting cash flow.  A big one is debt payments.  The amount of principle paid does not show up anywhere on the income statement.  Neither do equipment purchases or purchases of other assets.  And don’t forget depreciation, it is a non-cash expense that does show up.

Reviewing your income statement and budgeting are great functions to perform.  Yet do so in conjunction with your balance sheet to improve the management of your cash.  Cash is King and it’s one of the primary factors determining the future of your enterprise.