Bank Balance Barry

No offense to any Barrys out there - but this is the term I use for business owners who do “Bank Balance Accounting”. 

Bank Balance Accounting is when you use the balance of your bank account to determine how your business is doing. High balance? Business is GREAT. Low balance? Business is TERRIBLE. 

The problem with using your bank balance to determine the health of your business is that it doesn’t give you insight into the cash flows of your business. 82% of businesses fail due to cash flow problems, not profitability issues. 

You can show a net profit on paper (along with the taxes you’ll have to pay on that profit) and have no cash leftover to support your business. 

So what are a couple of things you can do to move away from being a Bank Balance Barry, and actually start monitoring your cash position in your business?

1. Look at cash income and expenses for the past 6-9 months (this is strictly cash coming in from revenue and cash going out to cover business expenses, not including loans or credit cards) >> Note: this will not necessarily be the same as what shows on your P&L if you have a credit card and/or loans

2. See what cash goes out to cover loans or credit card payments each month

3. See what cash goes out to cover asset/inventory purchases each month

4. See what cash goes out to cover owner draws/distributions

5. Now, see WHEN the cash comes in and goes out - is it at the beginning of the month? Middle? End?

6. From that - you should be able to create a map of how much cash you can expect to come in and out of the business and on what cadence each month. You can also see if you have enough cash to cover your current obligations, if items need to be cut, or if more revenue is brought in. It will also help you start to see if you have enough cash for future larger purchases, or if it’s time to start looking for capitalization if you need extra cash to expand.