Forget Net Income, What is Your Net Cash Flow
Net Income is one of the strongest indicators of a healthy business, but in my experience with small businesses, Net Cash Flow should be ranked higher. It is a true reflection of the business’ survival potential.
I get this question a lot - my company had a great net income but I don't see the money in the bank. Well, here is why:
Owner’s Salary - small business owners tend to take draws and not salary, and this skews the net income higher than what it really is. The reality is, the work that most business owners do are functions necessary for the business to run, and as such should be included in the company payroll.
Debt - paying off an old bill, a car note or credit card bill tend to feel like an expense but it is not; the expense was incurred at an earlier date.
Accounts Receivable (AR) - for my friends on an accrual basis accounting, net income will reflect revenue when invoices are created, but you may not necessarily have collected the money. So as your AR increases, it has a negative impact on your cash.
Taxes on net income have to be paid, and it is often times not forecasted during the period of performance.
Statement of Cash Flow - some business owner’s are not familiar with this report. It tells the story of where the money is spent in a business.
As a business owner, you have to look beyond net income; the goal is to have a positive net cash flow each period, which should be saved for business continuity.