Why Bank Statements Are Not Good Enough For Managing Cash Flow

Knowing Your Actual Book Balance

Many small business owners or managers take spending decisions based on the money they have in the bank account. This is a big mistake that usually leads a business to cash flow problems.

While a bank statement is useful when reconciling accrual-based book cash balances to cash balances reported by a bank, it is simply a record of historical transactions up to a given date. Bank statements generally do not reflect a company’s true cash balance due to timing differences between the activity recorded by the bank and the actions taken by a company affecting cash but not yet posted by the bank. Other debit or credit items may have been posted to a bank account but not yet recorded by the company.

Bank statements tell you where you have been not where you are at the moment. They provide you with deposits, checks drawn and electronic transfers made but have no idea what checks or deposits may be in transit. So bank statements are important to keep track of your overall business health but do not provide you with enough information to determine your actual book balance or payments, such as rent and utilities, that need to be made in the near future.

A bank statement is inappropriate for cash management because it is a snapshot and serves no forecasting function, and forecasting and planning are what enable the alert cash manager to foresee upcoming cash problems and properly provide for shortfalls and optimum investment.

While it may be helpful to know the cash balance at the moment, for cash management purposes it is more important to estimate realistically what cash balances will be in the near future. This is best accomplished by creating a cash projection or forecast report.

Author: Marc J Marin