Business Know How Part 2

My business is running well, my sales are on increasing trend...but i dont have money!!! Whats happening??? to answer this question, first i need to explain about 3 important business statements....income statement, balance sheet and finally cash flow statement. what an average business person tend to focus on is the income statement, where the overall records of sales and related cost of sales are recorded. the final output of this is your net income/ profit. But as shocking to most of the business owners...this income statement can show an astonishing high positive figure but yet they dont even have a positive cash balance.
What happens here is that, the sales are mostly done on account receivable (on credit), in terms of sales it has already been recorded as a sales in your income statement but unfortunately, the cash has yet to be realized.

That is why, it is important for you to also have the other two type of financial statements, balance sheet and cash flow. In this particular case, the cash flow will be more pertinent.
What is cash flow? Cash flow is a statement which records all the cash transaction that you do. In other word, if the sales is done on credit then it wont be recorded here, so you know exactly at a point of time how much cash balance that you have in your hand.
With this information, you can plan your future cash transaction/ need.
Assuming that all your sales are done on 3 months credit terms, sales done in January will only be paid in April.
All your purchase is done on cash terms, January expense is paid in January.

Jan:  Cash Expense = RM1000, Sales = RM1500, Cash in flow = RM 0
Feb: Cash Expense = RM1000, Sales = RM1500, Cash in flow = RM 0
March : Cash Expense = RM1000, Sales = RM1500, Cash in flow = RM 0
April : Cash Expense = RM1000, Sales = RM1500, Cash in flow = RM1500

If you just referred to your income statement, you will be happy to see that you have been recording a steady sales of RM1500 per month but in actual fact you dont have any cash in flow for the first 3 months. In total you have been incurring RM3000 of cost on cash without any cash in flow.

You must project your cash flow, then if you think you will incur a cash shortage in future, what you can do is to negotiate a credit terms with your supplier or arrange for a short term loan. If you can survive the first 3 months, the subsequent months will be better when your customer starts to pay.