Knowing whether you have cash in the bank to pay a bill is essential today. The problem is you can’t tell the profitability of a business through its checkbook.
Knowing if the bill you are paying generated a profit is more important for tomorrow. Failure to earn a profit means that you will soon run out of cash.
Business success lies in managing your cash and your profits through your financial statements, including your bank statement.
Running a small business out of the checkbook is not an acceptable management tool for managing any business. It means continually worrying about the money coming in and going out of the business solely through your bank account balance. Most business owners doing this don’t take the time to record the transactions occurring through their business in their accounting software. As a result, they are limited in how they manage their business to what their bank account reports as it relates to money coming in and out each time they check their bank balance.
Yes, small business owners who run their businesses out of their checkbooks have a rough sense of whether they have enough money in the bank to pay any due bills. Their primary problem is they cannot know if the money flowing through their checkbook is at a profit. Their secondary challenge is the deposits the business makes from selling services and products to customers on accounts they rarely know who still owes them. The result of these problems is they make less money than they should and have to scramble to collect the money due them when cash is tight.
Only after all of the revenue and expense transactions have been recorded for the accounting period can you create an accurate Profit and Loss Statement. This is why running your business out of your checking account is a grave mistake. Calculating a realistic profit picture from your bank statement alone is impossible.