|
Good bookkeeping and accounting isn't enough
Accountants have adopted a number of conventions for recording business transactions and preparing financial statements. These conventions are designed to provide information that is objective, consistent and comparable for all types of business structures. Unfortunately, there is a trade-off. The statements produce information in a form suitable for reporting (to the IRS), but often not suitable for analysis, planning and decision making. It is therefore critical for the business owner to understand the limitations created by the accounting conventions.
For example, let us consider the profit and loss statement (P&L), also called the income statement. It is designed as a summary of the transactions that produced sales revenue and operating expenses. Net profit (or loss) is not a measure of cash flow for the period. This is because an accountant's concept of revenue and expense focuses on the inflow and outflow of value, not the inflow and outflow of cash.
The "profit" reflected on a P&L is really an accounting concept measured as the difference between two other accounting concepts: revenue and expense. So-called "profit" is a good long term indicator of a company's financial performance. And, over the long run a firm's level of profit and cash flow will closely correlate. But the problem is that in the very important short-run, owners must be acutely aware of the difference that may exist between the amount of profit or loss as reflected on the P&L, and the level of cash available for use.
What It All Means
It comes down to this: Actual cash flow from operations (usually) involves items from both the income statement and balance sheet. In other words, the financial statements generated from the accountancy world usually do not help the business owner identify the most critical aspect of financial management: the cash flow. QuickBooks does allow for generating statements on a cash basis, but if the company uses the vendor bill pay and customer invoicing features, the so-called cash statements aren't really cash statements.
We Can Help
Our team at Beachside Business Services takes the mystery out of financial management. We show our clients how to get the most out of their QuickBooks reports. We teach them the correct reports to review, and show them how to analyze and interpret them in such a manner as they become the basis for management decisions and more profitability.
|
