You probably started your business because you’re passionate about a product or service, and wanted to share it. Good for you! We’re in that boat, too. When things like invoicing, payroll, and numbers start encroaching, the passion part often ends up in the back seat and your time is consumed by making sure everything adds up.
Knowing the answers to these four questions will give business owners back the time for the passion:
We plan on addressing these questions in separate blog posts, and we’ll start with question #1: How much cash do I have?
To address this question, we’d like to tell a story.
Anna bakes and sells apple dumplings. She grew up eating delicious, homemade apple dumplings at her grandpa’s house, and she loves them so much that she wanted to share them with others. So she started selling apple dumplings at farmers markets. The apple dumplings were a hit, and now Anna has a food truck that she sells her apple dumplings from and a kitchen location where she caters out of.
A day in the dumpling life
On Monday, Anna picks up her weekly order of 1,000 apples from a local farmer. She pays the farmer $450 with a check.
During that same day, Anna sells 150 apple dumplings from her food truck and makes $750 in credit card sales.
When she logs into her bank account at the end of the day to find out how much cash she has her balance is at $10,200. However, this number does not include the committed $450 paid to the farmer for apples. It also doesn’t include the $750 deposit from the daily sales.
So the question, how much cash do I have, isn’t fully answered by looking at a bank account balance. Anna’s bank account balance on Monday night is a snapshot of a moment in time, but it doesn’t reflect the true amount of cash she has because her uncashed check and deposits in transit are not represented.
Why it’s important to account for committed money
The uncashed checks and deposits in transfer are important to account for because factoring those numbers into what the bank account balance says is going to give Anna a more accurate idea of how much cash she has. With an accurate number, Anna will have a better idea of how much cash she has available to spend and even an idea of how well her business is doing.
The answer small business owners might die for
Great news! You can know what the numbers are for your committed money by using robust cloud accounting software. Our personal favorite is Xero. We really like Xero because it has a dashboard where you can easily see what your committed money is. Your accountant can see it easily, too, because Xero is a great platform for collaboration.
Your business is in motion, the numbers are always moving. Cloud accounting software is a way to see the numbers as close to real-time than ever before. And FYI, it’s very close.
Stay tuned for the next part in this post series where we address Question #2: How much do people owe me?