Cash Flow: It’s a pretty simple concept that most small business owners have a basic grasp on. It’s all about money coming in versus cash going out of the business and in the end, you hope that you have more coming in than going out!
But where is this money going? Tracking your cash flow and weighing the effects of specific balance sheet components can be tricky for new business owners. Today, we want to narrow your focus to only one thing: accounts receivable. We’ll take a look at the effects it has on your cash flow and why it is so vital to cash flow as well.
What is Accounts Receivable?
Accounts receivable is the balance that a customer owes you for goods or services already delivered or performed. Essentially, it’s money that you know you are due which hasn’t yet been paid by the customer. For this reason, it’s classified as an asset on the balance sheet. However, it has effects on cash flow and can hurt your business if you have the wrong mindset concerning accounts receivable.
How to Think About Accounts Receivable
Even though your accounts receivable is categorised as an asset on your balance sheet, too many small business owners find themselves making the same strategic mistake. The common problem is looking at accounts receivable as cash on hand. This type of mentality can sink a business and is incredibly dangerous.
While it’s true that you hope to have this cash in your hand at some point, you shouldn’t ever count your chickens before they hatch!
The Effect on Cash Flow
It’s common knowledge that cash flow is equally as important as profit in most cases. This is because, profit will determine the amount of cash coming in and by understanding where your money is going each month, you can manage it much better. If you were to only focus on how much profit you’re making, you could potentially make continuous operational mistakes that can starve your business of cash.
Let Us Help
Having a hard time collecting on your accounts receivable? Give ABJ Business Solutions a call and we’ll come up with a cash flow management strategy that works for you.