If you’ve ever wondered why your business is struggling with cash flow despite a strong month of sales, you’re not alone. Many entrepreneurs face this puzzling situation—sales are up, but the bank account isn’t reflecting it.
What Is Accrual Accounting?
Accrual accounting/cost matching is a method where revenues and expenses are recorded when they are earned or incurred, not when cash is actually received or paid. This means that even though a customer may have placed a large order last month, the revenue doesn’t show up as cash until the payment is actually collected—often weeks or even months later.
The Cash Flow Disconnect
Let’s break it down: imagine it’s January 10th. You closed several high-value deals in December. You invoiced these sales, but payments aren’t due until January 15th. Additionally, you renewed your business liability insurance for the next year, paid bonuses for last year (these were your top sales people afterall) and ran the first payroll of the year. Your bank account is nearly empty but last month was your highest grossing month. How is this possible?
What gives?
The disconnect between accrual accounting and actual cash flow could put you in a situation where you’ve earned income, but your cash reserves haven’t caught up yet.
In the examples above, that December revenue will show up as cash in January. Your bookkeeper accrued the annual bonuses for last year as a monthly amount so the total impact of that December payment did not show up on your Profit and Loss. Similarly, your bookkeeper will mete out that insurance payment in 1/12 increments over the next 12 months.
This is why understanding your cash forecast, rather than exclusively focusing on your profits, is crucial. Accrual accounting provides a clearer picture of your overall financial health, but you may need to do another layer of reporting to anticipate cash shortfalls before they happen.
How Vice Can Help
At Vice Financial Consulting, we understand that managing cash flow is one of the most important aspects of running a successful business. Many businesses face challenges in accurately predicting cash flow, often leading to missed opportunities or, worse, cash shortages that disrupt operations. To solve this, we combine up-to-date cash reconciliation, accounts payable (AP) entry, and sales forecasting to create an accurate cash forecast. Here’s how we do it:
1. Up-to-Date Cash Reconciliation
We begin by ensuring that your bank transactions in your accounting system are always up to date. This process involves continuously reconciling cash transactions in real time, ensuring that every deposit, withdrawal, and transfer is recorded promptly. By doing this, we have an accurate picture of how much cash is actually available, as opposed to relying solely on historical figures or estimations.
2. Accounts Payable (AP) Entry
Managing accounts payable is another key component in our cash flow forecasting. We track every outstanding invoice and ensure that AP entries are entered promptly into the accounting system. This allows us to have a clear view of all current liabilities—what the business owes and when payments are due.
Having accurate and timely AP entries gives us insight into upcoming cash outflows, which helps to balance against expected revenues. If a large payment is due in the next month, we factor that into the forecast, ensuring there are no surprises. We also track payment terms (e.g., Net 30, Net 60) to adjust cash flow projections, ensuring we never overestimate available cash based on unpaid liabilities.
3. Sales Forecasting
To project future cash flows, we need an accurate estimate of incoming revenue, which is where sales forecasting comes into play. We work closely with businesses to analyze their sales pipeline, historical trends, and market conditions to predict future revenue with a high degree of accuracy. This forecast isn’t just a number—we break it down by expected sales volumes, timing of payments (e.g., upfront, installment), and any seasonality factors that could affect revenue inflows.
4. Creating the Cash Flow Forecast
Once we’ve gathered accurate data on cash balances, accounts payable, and sales projections, we consolidate this information into a comprehensive cash flow forecast. This forecast shows the expected inflow and outflow of cash over a specified period, typically broken down by month or week. By considering the timing of both revenues and expenses, we can identify potential periods of cash shortages and advise on strategies to address them (e.g., adjusting payment schedules, securing short-term financing, or optimizing receivables).
Additionally, our forecasts take into account fluctuating cash needs for things like capital expenditures, taxes, or large one-off payments, ensuring the forecast is not just based on regular operational activities.
5. Proactive Cash Flow Management
The beauty of our approach is that it doesn’t just give you an idea of your financial position at a point in time—it empowers you to make proactive decisions. With an accurate cash flow forecast in hand, you can:
- Ensure there is enough cash on hand for upcoming expenses
- Negotiate payment terms with vendors or customers to balance cash outflows and inflows
- Plan for investment opportunities when cash reserves are strong
- Make informed decisions on taking on new projects, expanding operations, or hiring additional staff
At Vice, we recognize that accrual accounting is essential for accurately tracking profitability as it provides a clearer picture of your business’s financial health over time. However, we also understand that it can sometimes obscure your view of cash flow. That’s why we’ve developed a comprehensive approach that allows you to gain a full understanding of your financial position, ensuring you can see the bigger picture without losing sight of your cash flow.
