Last updated on Nov 7, 2023
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1
Understand the difference
2
Reconcile your bank statements
3
Prepare your cash flow statements
4
Analyze your cash flow statements
5
Review your bank and cash flow statements regularly
6
Here’s what else to consider
Balancing your bank and cash flow statements is essential for any small business owner. It helps you monitor your income and expenses, track your profitability, and plan for the future. But how do you do it effectively and accurately? Here are some tips and best practices to help you balance your bank and cash flow statements.
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- Muhammad Ikram Khan Accounting and Business Advisor | Author | Recruiter | ERP Strategist
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- Brett Forsythe Owner @ FCI LLC | Security Fence, Gates, and Automation
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- Linda Lavelle Esthetician, MakeUp Artist, Permanent Makeup, Medical Esthetician Linda LaVelle Day Spa and Salon
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1 Understand the difference
Bank statements and cash flow statements are not the same thing. Bank statements show the transactions in your bank account, such as deposits, withdrawals, fees, and interest. Cash flow statements show the movement of cash in and out of your business, such as sales, expenses, investments, and loans. Bank statements reflect your actual cash balance, while cash flow statements reflect your cash position and performance.
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- Brett Forsythe Owner @ FCI LLC | Security Fence, Gates, and Automation
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Do this regularly, like once a month. It's easier to catch mistakes when things are fresh in your mind. Use tools or software if you can. They can help make this process faster and more accurate.If you're ever unsure, ask for help. A bookkeeper or accountant can be your best friend here.Remember, keeping track of your money is like making sure your bucket of water stays full. By balancing your bank and cash flow statements, you'll always know how much water (or money) you have!
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- Mark Updegraff I help Active Real Estate Investors regain their sanity and make MORE MONEY 💵 while doing LESS WORK!
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I remember an instance early in my real estate career where this distinction nearly cost me a valuable deal. A prospective investor scrutinized my bank statement, noticing a large deposit. Believing it was a significant sale, he was almost ready to partner up. However, upon reviewing my cash flow statement, he realized it was a short-term loan. The cash flow statement gave a fuller picture, highlighting the loan's offset by a property upgrade, poised to increase rental income. That nuance, missed on the bank statement, was crucial. We eventually partnered, but it was a stark reminder: Bank statements show you 'how much'. Cash flow statements tell you 'from where' and 'why'.
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- Dale Jorgenson Retired Business Owner
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Every week my bookkeeper/accountant would prepare what we called a "dashboard" for me. Included would be:Current bank balancesAged accounts payable Aged accounts receivable and other information related to orders in process, including projected revenue and ship dates of all the orders. All of this information allowed me to see where we were at and where we were going financially. This was an effective way to keep up on finances.
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2 Reconcile your bank statements
Reconciling your bank statements is an important task to ensure accuracy and detect any mistakes, fraud, or missing transactions that could affect your cash flow. To do this, you should review your bank statements and accounting records for the same period, matching each transaction on both sources and marking them as cleared. Additionally, you should adjust your accounting records for any bank fees, interest, or transfers that are not recorded yet. It is also important to investigate any differences or discrepancies and correct them as needed. Finally, confirm that your adjusted accounting balance matches your bank balance.
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- Muhammad Ikram Khan Accounting and Business Advisor | Author | Recruiter | ERP Strategist
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Don't wait for month end. In big companies, I tell them to reconcile daily which gives you peace of mind at month end and reporting is very fast.
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If you use Xero for your bookkeeping, it's important to take the extra step of comparing the transactions you've reconciled with an actual bank statement. Xero, unlike QuickBooks Online, doesn't have a true bank reconciliation feature. You match all of the transactions that are imported from your bank, but you don't have the extra step of comparing to a bank statement and ensuring the uncleared transactions are all accounted for. If all of the transactions weren't imported correctly, or duplicates were imported, the account may appear reconciled in Xero but still not match your actual bank statement.
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- Charles Payton Regional Vice President Community Lending officer
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You have to utilize a software that's connected to your banks operating account and reserves. Also someone has to go into that account frequently to catch any errors. It's important to have a controller, book keeper, or CFO. Fraud protection is essential in this day and age. Business owners should also invest in cash management services offered by their institutions. Positive pay ach and zero balance accounts. Those products will help with accuracy and real time updated balances.
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3 Prepare your cash flow statements
Preparing your cash flow statements entails summarizing your cash inflows and outflows for a certain period, such as a month, a quarter, or a year. This process can help you assess your cash flow performance, recognize any cash flow issues, and predict your future cash needs. To prepare your cash flow statements, you need to categorize your cash transactions into three sections (operating, investing, and financing activities) and calculate the net cash flow for each section by subtracting the cash outflows from the cash inflows. Then, add up the net cash flows from all three sections to get the net increase or decrease in cash for the period. Finally, compare the net increase or decrease in cash with the opening and closing cash balances from your bank statements.
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- Linda Lavelle Esthetician, MakeUp Artist, Permanent Makeup, Medical Esthetician Linda LaVelle Day Spa and Salon
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Of course you have to add in the cash flows, but I’m very old school, if there is money left after disbursem*nt of bills then you’re making money. If you go in the negative, you’re losing money! Very simple to me. 45 years of running business, I think I have it downpat!
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- Mark Updegraff I help Active Real Estate Investors regain their sanity and make MORE MONEY 💵 while doing LESS WORK!
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In my early property management days, I mistook robust bank balances as healthy cash flow. One tight month prompted a deeper dive. Preparing a cash flow statement was enlightening: while rentals brought cash, property upgrades drained it, and loan repayments hit harder than expected. This wasn't just about bank balances, but understanding cash 'movements'. That insight reshaped my investment approach, ensuring liquidity amidst unexpected costs.
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- Joshua Bloom Audit Director | Not-for-Profit and Manufacturing
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The statement of cash flows is perhaps the most important financial statement. It’s like a movie for the year that shows your cash inflows and outflows. Net income is great, but cash flows from your business pay the bills!
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4 Analyze your cash flow statements
Analyzing your cash flow statements is essential for making better decisions, optimizing cash management, and achieving financial goals. To do so, you need to evaluate your cash flow ratios, such as operating cash flow margin, free cash flow, and cash flow to debt ratio. Additionally, you should identify your cash flow drivers, such as revenue growth, cost reduction, inventory turnover, and payment terms. Furthermore, you should assess any potential challenges to your cash flow such as seasonal fluctuations or delayed payments. Finally, you can implement strategies to improve your cash flow, such as increasing sales or cutting costs.
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- Mark Updegraff I help Active Real Estate Investors regain their sanity and make MORE MONEY 💵 while doing LESS WORK!
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About a decade ago, a troubling pattern emerged in my property investments. Despite high occupancy, cash seemed scarce. Diving into cash flow analysis, I discovered our payment terms allowed renters too much leeway, causing cash flow dips. Simultaneously, our inventory turnover was sluggish, tying up funds. By renegotiating rent payment terms and streamlining property upgrades for faster turnovers, I turned the tide. Analysis wasn’t just eye-opening; it was business-saving.
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- Susan Bryant, CPA, CTP Unboxed CPA propelling business owners towards their dreams. | 2021 Top 50 Women in Accounting | 2022 Enterprising Women of the Year Honoree | 2023 GS10KSB | Tax + Accounting + Business Strategist
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Cash if the lifeblood of a business and it's essential to understand the key drivers of cash flow. The cash flow statement is a tool to uncover issues, identify strengths, evaluate liquidity and predict future cash surpluses/deficits.
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5 Review your bank and cash flow statements regularly
Reviewing your bank and cash flow statements regularly is essential for staying on top of your cash flow situation, spotting any possible issues or opportunities, and adjusting your plans. To do this, you need to set up a schedule and system for reconciling, preparing, and analyzing your statements. Automating the process with accounting software or tools can make it easier. Additionally, you should track cash flow trends and patterns over time, compare your actual cash flow with your budget and forecast, and take action to address any gaps or deviations. Balancing bank and cash flow statements is an ongoing process that requires following the right tips and best practices. Doing this will help you balance your statements accurately and improve your cash flow management and performance.
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- Mark Updegraff I help Active Real Estate Investors regain their sanity and make MORE MONEY 💵 while doing LESS WORK!
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In my early investing days, I felt blindsided by unexpected cash flow hitches, despite a healthy bank balance. I decided to diligently reconcile bank and cash flow statements monthly. Once, spotting a stark discrepancy between a forecasted influx and actual numbers, I traced it to a major tenant's payment delay. By addressing this swiftly, I avoided a potential crisis. Automating this process later gave me back hours, but the lesson was clear: regular reviews are non-negotiable.
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- Susan Bryant, CPA, CTP Unboxed CPA propelling business owners towards their dreams. | 2021 Top 50 Women in Accounting | 2022 Enterprising Women of the Year Honoree | 2023 GS10KSB | Tax + Accounting + Business Strategist
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I recommend that business owners examine their cash position weekly in conjunction with evaluation of the A/R aging, A/P aging (and what bills will be paid) and other known, upcoming liabilities like payroll or sales tax remittance. Once that practice becomes a routine discipline, then I recommend implementing a cash flow forecasting tool so that the owner is getting more tuned into how actions (or lack of actions) are impacting cash.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Stephen Goldstein Advisory Services for Insurance Carriers, Distributors and Solutions Providers
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When in doubt, hire an expert! Especially if you are a startup, there are plenty of qualified Fractional CFOs out there who can help you with this. It will be money well spent!
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- Tara Lynn Gray Advocate | Change Maker | Speaker | Author of Soon-to-be-released book "Undervalued No More" committed to small business growth
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While tedious, the importance of these tasks can’t be underscored enough. Good financial management doesn’t happen by accident. Most seasoned business people know that once you take your eyes off the financials, trouble is likely around the corner.
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