Very often financial jargon and terminology is confusing to those who aren’t accountants. In any business we put a great deal of emphasis on cash flow and yet the term cash flow is used in a variety of contexts which can be confusing. As an example, business owners talk extensively about the Statement of Cash Flows and the Cash Budget which are two completely different documents developed and used for two completely different reasons.

Cash management takes a great deal of a business owner’s time and in the short term, the cash budget is most important because it assists a business owner or entrepreneur to manage the net working capital of their company.

The cash budget is a short-term financial statement, looking at monthly or quarterly cash flows. This document literally shows a business owner how much cash is available at the end of each month.

The Statement of Cash Flows is a comprehensive statement prepared along with the Income Statement and Balance Sheet. It looks at changes in operating, investing, and financing cash over a longer period of time, typically a year and forms part of a company’s annual financial statements.

In order to keep control of the financial reigns a small business owner must prepare both financial statements regularly and analyse them carefully. A quick look at any business plan template will highlight the importance of knowing your numbers.

Interesting to know: Profit vs Cash flow (Accounting 101)

Did you know that it’s still possible to have a major cash flow problem even when you’ve made a big profit? Cash flow management is critical to the success of your business.