Rektio Accounting knows how important it is for every owner to manage cash as they scale a business. As an owner understanding how cash flows through the business cycle and is affected by certain business activities is a big key to success. Items such as purchasing inventory, purchasing fixed assets, prepaying expenses, and servicing debt all have an effect on cash flow and it is important to know-how.

One of the big disconnects we see owners have is the notion of profit and cash flow. Often times companies struggle when they have a positive profit, yet end up with negative cash flow. Most of the differences below can all be categorized as timing differences. Meaning the difference when cash leaves the account vs when we see it return (Inventory, Accounts Receivable) or when cash leaves the account and when is it reflected on our Profit and Loss statement (Fixed Assets & Prepaid Expenses).

It is important to understand how the items below effect Managing Cash Flow:

  • Inventory are investments your business has made that you plan to profit from later. A good example of this would be products. You purchased a product to later sell.
  • Accounts Receivable is when you extend payment terms to a Customer. For example if you sell your Customer on Net 30 day Terms. You will recognize profit in the month of the sale but won’t receive cash for 30 days after the sale.
  • Fixed Assets are another possible activity in your company. This may include computers or office supplies that you need in order to run your business.
  • Debt Service is when a company pays back it debt only the interest portion of that payment effects profit where the entire payment reduces cash.
  • Prepaid expenses there are certain items that in the course of running you business have to paid in advance of their consumption. Two typical examples are insurance and annual licenses. You are forced to outlay the cash up front and expense the items over a period of time.

Understanding the challenges of operational constraints like cash flow are important, especially in the first 5 years of corporate development. Rektio Accounting has the experience and tools you need to maximize your resources for growth and success. Experience the impact that dynamic accounting can have on your business. Contact us today for a consultation.