Cash Flow is the fancy accounting term to refer to the actual money that the business receives or spends in a given time period, usually a month or year. “Cash” is the lifeblood of any business, the money moving in and out. Though cash is commonly used to refer to paper currency, in the world of business, accounting, and finance, cash refers to actual money, as opposed to the various financial instruments that are fancy IOUs.
Small businesses worry about when their clients pay, the impact on cash flow, not when the invoice hit’s the Profit & Loss Statement and Balance Sheet on an accrual basis. Every time you receive a credit card payment, Paypal, Venmo, or even check from a client, that’s a positive cash flow event. Every time you run your credit card or write a check, that’s a negative cash event.
Most of our clients are far more interested in managing their cash than worrying about traditional accounting metrics like Profit and Loss or Balance Sheet operations. The Profit First System is one of our most popular tools for helping small business owners manage cash flow, avoid tax surprises, and improve profitability.
For small businesses where the owner-operator makes all the major decisions, cash flow is a more useful tool than traditional accounting metrics. For larger organizations, with line managers making decisions with a business impact, traditional accounting systems are more important for that decision making.
In service businesses, cash receipts and revenue are mostly the same, beyond a little but of timing. However, in manufacturing, retail, or brokerage businesses, they can diverge dramatically.