It happens every year. A small business owner looks at their income statement and thinks “how can I have a profit? I don’t have that in the bank!” Or the reverse, you show a loss but there is money in the bank. But how can that be?
In Canada, unless you are a farmer, the CRA requires you to record your income and expenses by the Accrual accounting system and not the Cash Method. What does that mean? The difference is this:
Cash basis is the recording of income and expenses when you pay out or receive money. There is generally no accounts receivable and no accounts payable. Money in, money out.
Accrual basis is the recording of income and expenses when they occur. This means the date on the invoice or expense receipt is the date they are recorded. However, that’s not necessarily when you get paid or when you made payment on an expense.
If you get a bill from your telephone company in March, but you pay it in April, the expense will show up in March. Same goes for income, if you bill a client in March, but payment is not received until May, the income will be recorded in March.
Because a business is required to report on Accrual, it can make figuring out cash flow a confusing thing to try and figure out if you are not familiar with General Accepted Accounting Principles.
I have always been accustomed to giving my clients their Profit and Loss statement (or income statement) each month, only to have them scratching their heads. Mostly because in their minds they are working on a “cash basis” by looking into the bank and seeing what money was remaining. It wasn’t until I began to put together their cash flow reports for them that it all started to make sense.
I was at an event this past weekend where the speaker was discussing the importance of cash flow. Cash flow is a crucial system of reporting necessary for any business to survive, but most of us live without it.
Knowing your cash flow projection of the coming months allows business owners to spot potential problem areas that might be coming up in the future allowing them to plan more effectively.
How is a Cash Flow Report going to help?
Let’s say you pre-sell your services for a year. A client has decided to pay for the full year of your monthly services in advance. For example, if you charge $200 per month and the client would like to pay you $2,400 for the year. You take the payment and put it into the bank. Great! BUT! You are not claiming all of that income right away. The income statement will show the breakdown by month, the amount “unused” is going to show up on your balance sheet as “unearned income” in the liability section. (for more information on this see my blog called “Deferred revenue & Pre-paid expenses”)
That’s all well and good, but you still have an actual $2,400 in the bank and that is available for you to spend. This is where your cash flow projection report comes in to play. You can manage the cash flow weekly or monthly, depending on how much income and expenses you need to track and how crucial it is to keep a keen eye on everything.
Here is an example of a cash flow report that shows only a few weeks. You can create a cash flow to go as far into the future as you can predict. The cash flow can be updated frequently, and should be, to reflect the most current numbers:
Here is a breakdown of what you see:
Opening Cash: What you have in the bank
Customer Collections: The money you have received as payment for products and/or services rendered.
HST Refunds: If you are getting a refund from the CRA and you know when you will get it, record it in the correct week.
Recurring: Enter the amounts of recurring expenses, such as telephone, utilities, rent, etc.
Suppliers: This shows the payments you are making to suppliers you buy from to run the business, including equipment purchases that are not considered assets.
Payroll: Note both the payroll expense and the deductions at source amounts.
Other Liabilities: Things such as WSIB, HST or if you are making installment payments to corporate taxes would also show up here.
You’ll notice at the bottom of the sheet in yellow is the carry forward amounts each week that you should have in the bank. This would be the opening cash amount, plus the deposits you have going into the bank, minus the expenses you will be paying out.
Making it tailored to you
Anything that you need to pay out can and should show up on the cash flow sheet. This way you get an accurate handle on what is in the bank. This example, a pretty basic one, can be changed to reflect your actual businesses income and expenses.
Cynthia’s Challenge: This week take 15-30 minutes to record all of your income and expenses for this week. Consider it a small step to keeping better track of your bookkeeping that will save you time later.