Healthy cash flow is necessary to running a successful company. Maintaining an inflow of money helps ensure that your business keeps humming along. While obvious factors like sales affect cash flow, certain bookkeeping practices can also contribute to the amount of money coming into your company.
The following bookkeeping habits encourage healthy cash flow and help your business stay flush.
It’s impossible to ensure that cash keeps flowing without an up-to-date, accurate record of your small business’s finances. Without current records, you have no idea of many critical components of a healthy business. These include vital information such as if clients are paying in a timely manner, if there is a return on investment in areas such as production and marketing, and if expenses are in line with sales.
Staying on top of your bookkeeping will enable you to run important, informative reports such as a cash flow statement, income statement, and accounts receivable aging report. These reports give you an accurate picture of how well cash is flowing for your company.
It’s essential for your bookkeeping system to be designed for your business. This means ensuring you have a chart of accounts that accurately and thoroughly represents your company’s business. A chart of accounts generally includes five basic categories and, followed by subcategories. The general categories are income, liabilities, assets, equity, and expenses. Your subcategories will vary according to your business.
A thorough chart of accounts allows you to allocate every financial transaction to a category. This ensures that no expenses are ever missed and that you have accurate financial records. When everything that belongs in the expense category is entered there, you are well informed as to how much you’re spending to operate your business.
Frequent reconciliation of your books will ensure that any mistakes are caught early and corrected before financial reports are affected. One wrong entry will throw off your books, rendering all your totals incorrect, including your cash flow statement
When you reconcile, you compare your bookkeeping records to your checking, saving, and credit card statements. Your books should always match up with the totals on these statements.
One of the benefits of having up-to-date bookkeeping records is being able to spot money drains like overcharges and fraud. If you reconcile regularly, for instance, this ensures that you spot a charge that you or your employees didn’t make. That way you can contact the credit card company or bank to resolve the matter before too much time has passed.
Ensure that no expenses fall through the cracks, as this can result in paying more taxes than necessary. Additionally, failing to track all expenses will skew your books. Not having all expenses tracked will make it look as if your business is making more money than it is.
To ensure that no expenses are missed, use a business checking account and credit card. Only use these for company expenses. That way you simply need to enter everything on these statements into your bookkeeping system. Try to avoid using cash for purchases. If you do make purchases with petty cash, make sure to always get a receipt. For tax purposes, it’s a good idea to save all receipts, even for items bought with checks and by charge.
Creating invoices every time you make a sale or bill a client isn’t very expedient. One of the perks of having a good bookkeeping system is being able to interface that system with an automatic billing software program. Automatically generated invoices will give you more time to focus on sales and service. This will increase your cash flow and help ensure quicker payment.
Billing immediately after services are rendered will also help to increase cash flow. The quicker you send invoices, the quicker they will be paid. Automated billing systems also send invoice reminders nudging customers to pay.
Keeping a close eye on your accounts receivable aging report is crucial to ensuring a healthy cash flow. This report shows who owes your company money and how much. Running your AR aging report and analyzing it on a regular basis has several benefits. Doing so will help you:
A good bookkeeping system will enable you to track your sales monthly, quarterly, and yearly. For instance, you can see what sales were like last holiday season. This will help you plan and prepare for the next holiday season, so you can keep cash flowing.
Keeping a close eye on earnings with updated books allows you to see what segments of your business are doing especially well. When you pinpoint those areas with a high return on investment, you can focus on increasing your efforts in these areas. This could mean picking up the pace in production or planning promotions of popular items and services. It could also mean increasing prices on popular items. All such efforts are likely to increase your company’s cash flow.
Conversely, you can use your financial reports to identify areas of your business that are lagging in terms of bringing in business. That can give you the information you need to potentially discontinue certain services and products or allocate less time, focus, and resources to those parts of your business. This will free up more time for you to focus on those endeavors that are increasing cash flow.
Good bookkeeping habits can help you maintain a healthy cash flow for your business. The more current you are with your financial records, the better able you are to ensure that you have the funding you need to take your business to the next level. For a free trial of Swyft Books, which enables you to easily keep your books up to date, click here.