Beyond financial statements

The profit and loss sheet only lists income and expenses. It doesn’t give you a clue regarding the relationships between the numbers. Some entrepreneurs are top-line junkies and look only at gross sales, while others pay attention only to the bottom line (net income), but that doesn’t tell you the whole story of the business, either. Cash flow planning – where you lay out your cash flow needs, requirements and projections for a specified period of time – provides a much better picture of what is really happening in the business.

Cash flow planning: Look at the difference

Comparing your actual cash flow with your plan tells you where you are versus where you want to be. It allows you to see where the differences are and why you’re not doing what you want to be doing. Then you can make some proactive (rather than reactive) changes to improve operations.

When developing a cash management plan, you need to know three things:

  1. How much cash you will need to run the business.
  2. When you will need it.
  3. Where you will get it.

Net income and cash flow are very different. You can show a profit on paper and still run out of cash. Cash flow doesn’t necessarily equate to profit and loss.

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