The business owner is quite often confused when they look at their net income and their cash flow only to see that they do not match up. When this happens, many business owners will believe there is an error in their books and spend countless hours trying to determine where the error is. Before you begin wasting your time trying to look for the error in your books, Mark Dicus & Company would like to explain why the net income and the cash flow do not actually line up and why.
Difference Between Income & Cash Flow
Many business owners will look at their cash flow and net income and believe they are the same thing. Well, no they are two very different things, which can be very perplexing to many business owners. Why is the incoming cash flow not the same as the business’s net income? It is important to first realize that the net income and the cash flow are different and that difference matters. When the business owner looks over their company’s income statement for the month they will realize the cash that is in their bank account is not the same and is often less than the income statement. This is because you, as a business owner, is not separating net income from the cash flow which must happen.
What is Net Income & Cash Flow?
Let’s first define what net income is. Net income is the profit that a small business will earn over a certain duration of time. Most small businesses will monitor monthly net profits. Net income particularly looks at the revenue made and the expenses which were used to earn that revenue. The net income only looks at the records in which the revenue was earned. In accounting, the recorded revenue is when you have earned it or when the service or task is completed. Revenue is not when you are paid by a customer. Cash flow is when you were given a payment or cash for a service or product. The money given is then deposited into the bank. This is the business’s cash flow.
What Causes Net Income to Differ from Cash Flow
For many small businesses looking at the cash flow or net income together, it just creates a bigger mess. Depending on the company, many customers or clients do not pay the entire amount for the service all at once. Many businesses provide monthly installments or payments that is made until the full amount has been paid. Net income will look at the money that will be made and not the actual cash in the bank. This is why so many business owners get lost in their accounting. When going over the books, make sure to properly understand the major difference between cash flow and net income. By keeping net income separate, the business owner can better project future income and make better decisions for the company. Cash flow provides you an amount of what is in the bank now.
Accountants, Bookkeepers & More in Everett, Bellevue, Kirkland, Renton, Kent, Tacoma & Seattle, Washington
Trying to keep track of your cash flow, net income and other accounting and bookkeeping tasks can be very demanding. For the super busy business owner that finds they need help with their business’s bookkeeping and accounting, contact Mark Dicus & Company today.