Cash Flow Explained – Bookkeeping & Accounting
As individuals although we may not do bookkeeping and accounting for our personal affairs, we are all familiar with cash flow in our personal lives. You don’t need an accountant in Liverpool or an accountant in Southport to tell you that if cash is received for work done and used to purchase goods and services, then you should be able to easily figure out if you are left with a cash surplus, which is obviously good, or overspending which is unsustainable.
A small business works on exactly the same principle but can sometimes appear to be a little more complicated, but in essence a business buys stock for cash and then sells it to clients for cash. However businesses often buy and sell credit, so the stock is received before it is paid for, and sold before it is paid for, so there will be no movement on cash flow until money is received or paid. Money owed is recorded by your bookkeeper or accountant as a debt. Only cash purchases or sales have an impact on cash flow.
As far as bookkeeping and accounting terms go, customers or clients that owe money to your company are called Debtors and suppliers that you owe money to are called Creditors. Apart from Debtors, some payments have an immediate impact on cash like salaries.
We are accountants in Liverpool for some clients that are cash based businesses like retailers, we are also accountants in Southport for clients with restaurants and hotels, these often have quite good cash flow because customers pay immediately which gives the business cash in hand, whereas the same business will pay lots of suppliers in credit so payment is delayed. Other business, like contractors have immediate cash outflows for wages and possibly some supplies that are not on credit, but they often don’t get paid until after the project is completed, and event then it could be 30 days or more after completion of the project – as you can imagine this can sometimes cause problems when it comes to cash flow. In these situations the business will often try and get interim payments off clients to help with cash flow and lower risk of non payment, and or have banking overdraft facilities. Other causes of cash flow problems are slow paying Debtors or bad debts, if customers don’t pay on time or don’t pay at all your business will still have money outflow which if not careful can lead to money running out. You may have heard that it is possible for a profitable company to go bust, this is one of the reasons why, they haven’t managed their cash flow properly.
Other sources of inflows and outflows of cash apart from the normal operations of the business that need to be taken into consideration come from things like new loans to the company or sale of shares, and the purchase of fixed assets that need to be paid for such as property or equipment.
Having cash to pay bills is liquidity. The term liquidity in bookkeeping and accounting is the speed a company can realise its cash to meet debts as they come due, and the term solvency is a company’s ability to pay debts when they fall due and is making enough outputs to continue its operations. Insolvent companies cannot pay debts, and knowingly trading while insolvent is a criminal offence.
Accountants are often seen as accounting for what has happened in the past, whereas Cash flow, although you can look at past, a cash flow forecast in bookkeeping and accounting is what is really important and is all about knowing what cash is going to go in and out and when. The timings are recorded on cash flow statement, which start with bank opening balances, record cash coming in and when, listing cash to be paid out and when, which will tell you if your cash flow is positive or negative on specific time periods e.g. Monthly Cash Flow Statement.
We are Accountants in Liverpool and Accountants in Southport for some great businesses in Liverpool, Southport, Ainsdale, Formby and the surrounding area, and as well as being their accountant we provide flexible bookkeeping services including helping with cash flow management. Get in touch if you need support with your business too.