Tag Archives: cash flow

Profit or Cash Flow 2

A previous article, showed the differences between profit and cash flow. Many business people understand the difference, but my previous article highlighted the importance of CASH MANAGEMENT! I will attempt to provide more detail, with regard to cash management, in this latest offering.

The thrust of my articles, attempt to explain the difference between profit and cash. The cash building strategy outlined below, will reflect differently in the books of account of a business. In fact, these reserves will nor reflect on the Profit and Loss/ Income Statement accounts, and yet, it is the most crucial aspect of the finances!

People are tempted to always spend more money than they make. We see the constant pursuit of higher earnings from working and business people alike. But after earning that increase in income, people remain deeper in debt than before. Expenses chase income, and wins the race most of the time. We remain trapped in the illusion, that more money, is the only way out of the mess.

Look at families taking extra jobs, employees who receive the promotions with the salary increases, businesses who secure additional contract, but they remain short of cash, or more in debt. When people earn more, they spend more. Simple as that. The strategy is to save cash before it is spent. The excuse that there is not money to save, is not valid. The sooner its implemented, the better.Discipline and dedication is required. It can work.

Bank Savings Accounts:

Open three different accounts, at three different banks, in three different areas. Reason? it limits the temptation to withdraw cash from these accounts. The account type does not matter(preferably interest bearing), but designate as described in previous article.

1. A building/ expansion fund

2.Tax fund

3.Emergency Fund

Commit to savings by signing a monthly transfer of say;

1.Building fund@ 2% of Average Monthly cash deposits

2.Tax fund@1% of Average Monthly deposits

3. Emergency fund@ 1% of Average Monthly deposits

Let it run, for three months, and gradually start to up the percentage by 0,5% a month.
See savings as an additional expense, and factor the savings into your monthly budget.Credit Card/s:

Credit cards are controversial and problematic, but you can make this device work, for YOU and YOUR business, instead of the other way around.

Don’t destroy your card, but put it out of reach. If repayments on a card is say $500.00, commit yourself to pay an additional $250.00, on the card.Dont make any arrangements with the bank, just pay the card direct.No bank fees on cash deposits made in a credit card.
What happens, is that the bank draws their arranged amount, and it is augmented by an additional payment, resulting a a rapid reduction of debt on the card over a six month period.
After twelve months, the credit card could swing into a positive balance.The interest on cards with a positive balance vary, but is higher than some savings accounts.

If you committed to the savings program outlined above, the percentages and transfer arrangements for your savings accounts and credit card, you will detect a notable increase in cash, and reduction of expenses. You not compelled to save more, and can spend available cash as you please, if all your bills are paid.

If the cash in reserves grow, you can utilise it as follows,( preferably after twelves months)

1. Tax Fund, to pay any unexpected taxes

2. Emergency Fund, any expenses not covered by normal insurance, staff incentives. Vacation.

3. Building fund, should be accessed after two years, but can be used to purchase capital equipment.

Use the credit card for purchasing additional equipment, when the need is there.And start replenishing the card balance at your soonest.Be careful, don’t go on a spending spree. Put the card away, as soon as it is utilised for emergency funding, don’t leave it in your wallet.

Create a separate spreadsheet, for your accounting for Cash In, Reserves, Cash out. Don’t use conventional accounting software(will just confuse the process). Maintain stats on a monthly basis, and start forecasting your cash flow.

Don’t wait until sales improve, start saving now, even if it is just 1% of cash. Look at savings after a year. Maybe you can indeed go on that dream vacation after three years!


How to reconstruct a Bank Statement

A challenging part of accounting can be the bank reconciliation. To some bookkeepers recons are fun, to others, it is nothing but a tedious bore. Whatever way we look at it, it is a function of accounting that must be done. Checks that are processed late, can bounce, if ample provision for it has not been done in the books of the business. But recons, or “check book balancing”, is equally important to none business people.

The bank recon is simply the “marrying” of a balance on a bank statement, on a given date , with the balance in your cash book.

Bank charges are added to cashbook payments, outstanding check are deducted, and outstanding deposits are added. Standing or debit orders are added to payments and hopefully the balances will agree. Business should budget for payments from cash book balances, not bank statement balances.

Many numerate people have a grasp of bank reconciliations to some degree. There are occasions that bank reconciliations cannot balance. And this could be ascribed more to missing information, than the skills of the person performing the recon. In such instances the banks statements have to be reconstructed.

A bank statement for a particular period could consist out of several pages depending on the size of the entity concerned. If one page is missing, the reconciliation will not balance. Transactions on the missing page obviously impacts on the outcome of the bank recon.

What if you aware a page is missing, and is in no position to contact the bank for fresh statements. Banks normally archive, statements older than 6 months, and it could cause delays, when copies are requested.

Herewith some guidelines on reformatting your bank statements.

* Check the sequence of the bank statements.

* If a statement is indeed missing, the closing balance, on one page, would differ from the following statements opening balance. Calculate the difference.

* If a difference has been established, scrutinize your check book stubs, to tie that amount to a check number not identified on the statement.

* Verify, recurring payments, such as standing orders, for prior months, and check if that amount cannot be linked to the missing information.

* List all payments, you have the checks stubs, and standing order amounts.Lists all deposits.Add deposits to opening balance. Deduct all payments and compare to final balance. The variance could be unrepresented checks, or bank charges.

* Some bank statements give precise detail on how many checks were processed and the total amounts on the first page. This simplifies the process.

Bank reconciliations can turn out to be challenging, but fun.


Author: Sean Goss  sgafc@mweb.co.za