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Who Asked:  A small inventory based business owner is wondering how to manage the business in relation to the bank balance that they have.

Question:  “Hey, my bank balance increases, so does that mean that I'm doing good in my business? My bank balance goes down, does that mean I'm doing bad in my business?”

bank account balance FAQ

Answer:  At the end of the day, you cannot be managing your business from your bank account. There's way too many variables that go into having a smaller bank balance versus having a bigger bank balance.  You need to understand from a cash perspective, that running your business is really a short term cash management process.

Watch the Video Answer

Steps to Start Planning Cash Ahead of Time:  Start at Four Weeks

Look at a minimum running of your business for the next four weeks from a cash flow sampling. 

You need to understand what is coming out in the next four weeks.  

Ask yourself: What is coming out in the next four weeks I need to manage and account for? 

What does that include? 

  • Bills to pay to your legal services providers, or suppliers, or material manufacturers
  • Rent
  • Contractor payments that you may have employees that you need to pay on payroll

On top of that, you need to understand and manage orders coming in the next four weeks:  

  • If you have huge invoices that are due from your wholesale customers, or your business customers - awesome.  You need to factor that in and make sure that you get paid
  • On those invoices that are paid, you need to know that they are due to you on time. 
  • Also, if you're selling on your eCommerce platform or Amazon, what are the expected deposits you'll be receiving? 

So at the end of the day, running your business out of your bank balance is not a good idea, especially if you want to take this business very seriously.

 

How to Build Upon Using Your Bank Account Balance as a Short Term Cash Flow Tool

If you look at your bank balance (or bank balances of your multiple accounts), and then you factor in what's coming out/ what's coming in, then you can understand the net cash or the balance, or the bottom line at the end of that - from zero, to next four weeks.  If you do that every week, let's say rolling four weeks, then that is a good start for you to manage short term cash. 

 

After that, you can build upon two month, three month cash flow.  After you do all that, you need to then factor in the P&L, and financial reporting review, as well as long term balance sheet understanding. 

 

The Bottom Line

Don't manage your business on your bank account. You need to understand what's in your bank account, what's coming out, what's coming in, in the next four weeks at a minimum.  You do that every week, that's going to help you run your business (properly). 

 

More Resources on Cash Planning:

 

For more answers to your accounting FAQs, follow us on social media to see answers like this streamed live in our Making Cents FAQ series.  You can submit a question via DM or to hello@accountfully.com

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If you would rather hand the cash flow planning over to the pros, we are here to help.  Take a look at what we offer and tell us about your business. Together, we can discuss what works best for your business situation.  

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