Difference Between Cash Flow Statement And Profit And Loss Statement Profit or Cash Flow 2

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Profit or Cash Flow 2

The previous article showed the differences between profit and cash flow. Many business people understand the difference, but my previous article highlighted the importance of CASH MANAGEMENT! I will try to provide more details, regarding cash management, in this latest offering.

The essence of my articles is an attempt to explain the difference between profit and cash. The cash raising strategy outlined below will be reflected differently on the company’s books. In fact, these reserves will not be reflected in the income statement/income statement, and yet, it is the most important aspect of finance!

People are tempted to always spend more money than they earn. We see a constant aspiration for higher earnings among both employees and business people. But after earning that increase in income, people remain deeper in debt than before. Costs chase revenue and most of the time it wins the race. We remain trapped in the illusion that more money is the only way out of the mess.

Look at families taking on extra jobs, employees getting promotions with pay raises, companies securing additional contracts but short of cash or in debt. When people earn more, they spend more. Simple as that. The strategy is to save money before it is spent. The excuse that there is no money for savings is not valid. The sooner it is implemented, the better. It takes discipline and commitment. It can work.

Bank savings accounts:

Open three different accounts, in three different banks, in three different areas. Reason? it limits the temptation to withdraw cash from these accounts. The type of account is not important (preferably interest-bearing), but specify as described in the previous article.

1. Construction/expansion fund

2. Tax fund

3. Emergency fund

Commit to saving by signing a monthly transfer say;

1. Building fund @ 2% of average monthly cash deposits

2. Tax fund @ 1% of average monthly deposits

3. Emergency fund@ 1% of average monthly deposits

Let it run for three months and gradually start increasing the percentage by 0.5% per month.

Look at the savings as an additional expense and factor the savings into your monthly budget.

Credit cards:

Credit cards are controversial and problematic, but you can make this device work for YOU and YOUR business, instead of the other way around.

Do not destroy your card, but place it out of reach. If the payment on the card is say $500.00, commit to paying an additional $250.00 on the card. Do not negotiate with the bank, just pay directly by card. There are no bank fees for cash deposits to a credit card.

What happens is that the bank withdraws its agreed amount, and it is increased by an additional payment, which results in a rapid reduction of the debt on the card in a period of six months.

After twelve months, the credit card could become a positive balance. Interest rates on credit cards vary, but are higher than some savings accounts.

If you’ve committed to the above savings program, interest and transfer arrangements for your savings accounts and credit card, you’ll notice a significant increase in cash and a reduction in expenses. You are not forced to save more and can spend the available cash as you wish, if all your bills are paid.

If the cash in the reserves increases, you can use it as follows (preferably after twelve months)

1. Tax fund, to pay any unexpected taxes

2. Emergency fund, all expenses not covered by normal insurance, staff incentives. Rest.

3. Construction fund, should be accessed after two years, but can be used to purchase capital equipment.

Use a credit card to purchase additional equipment when needed. And start topping up the card balance as soon as possible. Be careful, don’t rush to spend. Put the card away as soon as it is used for emergency financing, do not leave it in your wallet.

Create a separate spreadsheet for your accounting for Cash In, Reserves, Cash out. Do not use conventional accounting software (it will only confuse the process). Maintain statistics on a monthly basis and start forecasting your cash flow.

Don’t wait for sales to improve, start saving now, even if it’s just 1% cash back. See the savings after one year. Maybe after three years you can really go on that dream vacation!

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