If your finances have you in a mood, know that you’re not alone. According to a study conducted by Northwestern Mutual, 50% of Americans feel anxious, insecure, and scared about their finances on a regular basis. In fact, financial stress is the dominant source of stress in the lives of Americans. Brightflow AI is helping small business owners alleviate this stress by demystifying finance.
One of the biggest mistakes small business owners make is failing to look at the overall picture of their business. In other words, business owners often focus too much on income statements and generating profits, instead of cash flow management, which is essential for a business’s success. Being able to understand the difference between cash flow and profits can make or break your business. While profits are important for a business’s success, they are not as important as cash availability.
Profits are an accounting and tax concept, that comes into play at the end of an accounting period and at tax time. Cash flow refers to the movement of money into and out of your business, through your business checking account. Profits for a business is shown on an Income statement, but only at the end of a month, quarter, or year. It doesn’t help you figure out how to deal with the ups and downs of cash during a month.
Generally Accepted Accounting Principles (GAAP) is a uniform set of rules for accounting created by the Financial Accounting Standards Board (FASB). GAAP makes analyzing and comparing different companies easier for investors and creditors through uniform guidelines for measurements, disclosures, item recognition, and presentation.
Shortcomings of GAAP
However, GAAP is not all sunshine and rainbows, there are some instances where GAAP can fail to represent a business’s operations. Oftentimes, non-GAAP figures can provide a clearer picture of an ongoing business as non-GAAP figures typically exclude irregular or non-cash expenses (such as one-time balance sheet adjustments), thus smoothing out volatility in earnings due to temporary conditions. Additionally, non-GAAP figures such as those generated by cash accounting can help develop forward looking statements and anticipate future cash flows.
The Two Different Ways of Accounting:
It’s the standard accounting principle used in GAAP that is necessary for financial reporting. In this method regardless of when the company actually receives the money, a company’s income and expenses are recorded when they are earned and billed.
It’s a non GAAP method that is necessary for internal business operations and decision making. In this method you record income and expenses when they are paid, unlike accrual based accounting.
The Bottom Line:
In order to put your company in the best position to succeed, you have to understand the difference between the different ways of accounting. While accrual based accounting is popular and necessary for financial reporting as it abides by GAAP, cash-based accounting is just as important as it draws a clearer picture of day-to-day operations. Cash accounting is essential for sustaining your business as it will allow you to pay your bills on time and keep your business running.
Don’t worry if you get confused because Brightflow AI can sort it all out for you! Brightflow AI is an affordable and easy-to-use financial tool that gives you an instant cash flow forecast by seamlessly integrating with all your financial data. You’ll see all the cash coming in and going out of your business, which means no surprises and complete peace of mind.
You can schedule a free assessment with Robbie Bhathal, Founder & CEO of Brightflow AI, to get a financial analysis of your business!