Improve your cash flow: Understand basic accounting

March 24, 2015 -  By

accountingThis post is part five of LM’s “5 ways to improve your cash flow” series. Read the first four tips here.

Despite its importance, many green industry business owners don’t have a clear understanding of their businesses’ cash-flow situations. Why?

Many business owners don’t pay nearly enough attention to basic accounting. In fact, many companies think of accounting only in terms of the annual ritual of income tax preparation. Business owners with this mindset usually don’t use accounting data to manage their businesses and are frequently surprised by eroding margins and cash crunches that could be avoided.

Another reason business owners have trouble understanding their cash flow is the line between business and personal affairs may blur. Instead of paying themselves with profits, some owners use their companies as a personal checkbook, making it difficult or impossible to sort out the true profitability of the business. More than once, I’ve cringed when a client talks about his or her business operating at break-even or worse when the business itself is profitable. The cash flow is obscured by excessive salaries, personal expenses and perks run through the company.

To win the game, whether that means generating consistently profitable operations over the long haul or building the value of your business in anticipation of a sale or other transaction, you have to keep score.

If you don’t understand your business cash flow, there’s no other priority more important to business success. Fortunately, there are places to turn for help, such as an accountant, trade associations, conferences, peer groups and consultants. They’ll help you focus on the right numbers and build the systems to produce those numbers reliably.

Edmonds, a corporate finance professional and certified public accountant, is the principal consultant for The Principium Group.

Photo credit: 401(K) 2013 / Foter / CC BY-SA

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Ron Edmonds

About the Author:

Edmonds, a corporate finance professional with experience in merger-and-acquisition transactions, is the principal consultant for The Principium Group. Contact him at redmonds@principiumgroup.com.

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