Monday’s= Small Business
Business owners are sometimes surprised when I tell them that they are making money. They assume that because there is no money in their bank account that they are not profitable. The “accounting joke” that follows, goes like this, “Just because you are making money does not mean that you have any money.”
What causes a business to be making money but to not have any money in the bank? The usual problems are firstly that some of their customers have yet to pay their bills. If you bill someone in October, you make the profit in October. But, you might not get paid until December or maybe January. You have cash flow when you get paid, you have profit when you bill. The second problem that comes up is inventory. Money that has been invested in inventory is money that is not in the bank. Inventory is an asset, and as such makes its life on the balance sheet. If your inventory is going up this is where your money is — in product, not in the bank.
Business owners need to manage cash flow carefully. Both receivables and inventory should be carefully monitored.
A large company can fail to pay its bills without anyone worrying about its survival, in many cases. A small business that cannot pay its bills will be perceived as not being successful.
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