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Why net income does not drive cash flows


I have spoken with many business owners over the years and the most confusing concept for many to grasp is, “How do I have a net profit on the income statement, but no money in my bank account?” For people who don’t have the accounting knowledge this is a legitimate question and I have two questions I immediately ask.


Are you keeping track of money owed to your business?

Income does not all come from your bank account. If you provide services to a customer and send them an invoice to pay you at a later date, the total of the bill you sent is included on the income statement as revenue. This shows you how busy your business has been and what changes you can make to get more customers. However, receiving payment for these invoices is what drives your cash balance up. If you have a record breaking month when it comes to revenue, none of that matters if you don’t follow up with your customers to pay you. The quicker you get paid by your customers the more control you have over your cash flow.


Are you taking out money for personal expenses?

When it comes to money going out, please avoid drawing money out of your business bank account for personal expenses. This is the most overlooked cash flow item when I look at a business’ financials. It is very easy to see a lot of money sitting in your business account and take some out for shopping, non business meals, amazon, etc. I always suggest to my clients to get payroll set up for bi-weekly payouts or if you are wanting owner’s draws, make sure you are pulling the same amount out every month. It is a constant battle keeping cash flows consistent monthly, so keeping this stable is one more thing you can have control of when it comes to cash flows for your business.


Last bit of advise, work with a reliable bookkeeper who will help you decide how much you should pay yourself each month.


If you have any questions or comments, please contact me today!

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