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Why your bank account may not reflect the sales that you have made

Written by: Mark Gwilliam

Article Overview: If you are just starting out with your small business, it could be that you are not too comfortable with the ins and outs of financial management. You may have been misled into thinking that your bank account is a good way to measure the sales that your business has made in a certain period of time. In order to understand why your bank account is not an accurate reflection of your sales, there are a couple of things that need to be taken into account.

Why your bank account may not reflect the sales that you have made

You need to realise that your bank account balance is the result of all the cash debits and credits that your business has incurred in a certain period. Debits are money items that were charged to your bank account and include cheques, cash withdrawals, and direct debits that were used to pay for the various expenses that your business incurred. For example, if you had to pay rental fees for your office space, you may have written a cheque to your landlord and it would have been deducted from your account balance. Credits are all deposits that are made to your account. If a customer wants to pay you for some goods he bought, he would pay the money directly into your account. If you earn any interest on your account, that amount will be credited as well. Your bank balance reflects all the cash that your business earns and pays out, not simply the cash that is generated by sales.

The other thing you need to consider is accounts receivable. Most businesses will allow their customers to pay for their purchases after a certain amount of time has passed from the actual date of purchase. If a business has accounts receivable, it means that the sale has been made, but the money for the sale has yet to be collected. Since a bank account only shows cash transactions that have already taken place, accounts receivable aren’t reflected in its balance. Depending on the type of industry you’re in, accounts receivable can make up a substantial part of your sales revenue. So referring to your account balance for an indication of how well your sales are doing could lead to false conclusions.

To understand how well your businesses sales are doing, it would be much more advisable for you to look at your profit and loss statement. This financial statement has an item called gross profit incorporated into it which reflects only the revenue that is generated by a businesses sales less any direct costs of production.

For those of you who are interested in learning more about small business accounting have a look at my article How to Prepare a Budget.

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Article Tags: accounts receivable, amount of time, bank account balance, bank balance, cash transactions, cash withdrawals, cheque, debits and credits, direct debits, false conclusions, financial statement, gross profit, landlord, money, office space, place accounts, profit and loss, profit and loss statement, small business



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