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Account Reconcilement Defintion

Account Reconcilement Definition

The account reconcilement definition is the process of comparing a company’s account (or bank) statement with its own accounting data in order to detect any inconsistencies between the two. Account reconcilement inside organizations is essential for keeping track of any errors that may point out cash-leakage, miscalculations, or just an honest blunder.

Nowadays, we live in a world where the computer can complete many processes. As a result, automation is dominating accounting processes. Being that, discrepancies can be far less common between the two sources, helping institutions save both time and money.

Why Reconcile Accounts?

Now that we know the account reconcilement definition, we need to understand the reason as to why it matters to a company. Before account reconciliation became a norm, many companies asked “why reconcile accounts?”.

Account reconcilement should be a company’s main regulatory and compliance function. By reconciling accounts, you prove that account balances are parallel. This process confirms that the amount of money leaving is the same amount of money being spent.

Reconciling also helps prevent fraudulent actions and avoid financial statement mistakes. Furthermore, outside regulators find this process to be critical when conducting periodic audits of the company.

Simplified Reconciliation Process

Find the simplified reconciliation process below:

  1. First, gather all the necessary accounting information together
  2. Compare the company’s bank statement to the general ledger cash account
  3. Take note of all the items that remain in the company’s ledger, and add the pending deposits to the final balance
  4. If your have an interest bearing account, then add that as well
  5. Deduct any outstanding checks from your final balance as well as any bank errors (such as inaccurate deposits and inaccurate debits)
  6. Subtract bank service charges
  7. Finally, confirm that both statements – your bank statement and your recorded balance – are equal, as they should be

If there are any errors after you compare the two, then review each step. Make sure that everything is posted in the general ledger. And adjust you bank balance for all outstanding checks and pending deposits.

Sarbanes-Oxley and Account Reconciliation

On July 30th 2002, the United States Congress passed the Sarbanes-Oxley Act. Also refer to it as the”Public Company Accounting Reform and Investor Protection Act”. This helped protect stakeholders from the possibility of fraud. This bill was enacted after various major corporations had been discovered with huge accounting scandals, such as Enron and Worldcom.

It administered strict requirements to improve financial disclosure from firms and decrease the chance of accounting fraud. It consisted of the following 11 major elements:

So how does Sarbanes-Oxley and account reconciliation relate? Sarbanes-Oxley set up the parameters for account reconciliation. Before, accounting standards did not hold corporations accountable to best practices. However, companies are now required to certify its internal controls – changing their common audit procedures.

Account Reconcilement Definition

Maximizing Your Bottom Line In 3 Simple Steps

Sales are great, but wouldn’t they be better if you were actually able to reap the rewards? Many CEOs that were not trained with an accounting/finance background struggle to understand profitability. They think that if sales are great, then the business is great. But when sales increase, inventory and overhead increases. Productivity also decreases – due to exhaustion or overwork. Collections lapse because there isn’t a “pressure” to collect. And unfortunately, that is when companies suffer the most. Sales start to decline, but they don’t change their habits. In this Wiki, you will learn how everything below sales on your income statement is critical to your company’s success and how you should be maximizing your bottom line – net income – at any stage of your company’s life cycle. Let’s look at how maximizing your bottom line in 3 simple steps can happen.

What is the Bottom Line?

First, what is the bottom line we are referring to? It is the net income on your income statement or P&L statement. This is what you have left after all the costs of goods sold, administrative expenses, and overhead have been subtracted from revenue. We look at this number carefully because that is how much you are able to put into retained earnings or reinvest back into your company. In addition, the amount can be used to issue dividends to their shareholders. Maximizing your bottom line should be an integral part of your company’s processes.

Profitability starts at the top of the income statement. If your prices are not set to create profitable environment, then you will be not able to maximize the bottom line. Learn how to price for profit using our Pricing for Profit Inspection Guide.

Maximizing Your Bottom Line In 4 Simple Steps

There a are several ways to maximize your bottom line – some more extensive and time consuming than other. But there are 3 areas to focus on to maximize your bottom line – including productivity, overhead, and collections.

1. Productivity is Key

It’s been a common theme among business blogs and news sources (Entrepreneur, Forbes, WSJ, etc.) to improve productivity. Why? Because productivity is key in maximizing your bottom line. But what really happens when you improve productivity? You have more supply, decrease the cost to produce 1 unit, and increase sales. It speeds up your operations so that you can fulfill more orders for quickly.

2. Manage Overhead

Great revenues have very little meaning if your overhead costs are not properly managed. Look deeper into your overhead expenses and find out if there are any costs you can reduce or completely remove. The problem is often more complex than large expense accounts on the P&L. You must interact with various departments to think critically and solve problems. Ensure that every single overhead cost is necessary to provide the desired service levels. Maximum controllability over costs leads to higher profits for the company to reap.

3. Collect Quicker

Collections are an important part of business. If a company sells $10,000 worth of product but only collects $3,000, then their cash is tied up in inventory, etc. As a result, they experience a cash crunch. We have worked with clients who were in the same situation and they neglected to ever collect the outstanding balance. Their bottom line suffered, but they didn’t think to look at their collections process. There are two metrics that you can look at to monitor collections and use to collect quicker.

The first metric is DSO. Do you know your Days Sales Outstanding (DSO)? This is a great measurement to know where you are currently and how by making slight adjustments, you can increase profitability. Use the following formula to calculate DSO.

 DSO = (Accounts Receivable / Total Credit Sales) * 365

The second metric to look at is Collections Effectiveness Index (CEI). This is a slightly more accurate representation of the time it takes to collect receivables than DSO. Because CEI can be calculated more frequently than DSO, it can be a key performance indicator (KPI) that you track in your company. If the CEI percentage decreases one month, then leadership are alerted that something is going on. The goal here is to be at 100%.

CEI = [(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) ÷ (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)] * 100

Another method to collect quicker is to tie receivables to the sales person’s commission. This will not only encourage your sales team to be part of the collections process, but it will help keep your company cash positive.

Effective Strategies for Improving Profitability

While we’ve been focused on maximizing your bottom line as your current financials stand, we also wanted to share some effective strategies for improving profitability.

Price for Profit

Are your prices leading to a satisfying net income?  If not, then these are some questions you can inquire:

  • Are additional costs being reflected on the price?
  • Are you using Margin vs Markup interchangeably?
  • Is your overhead being covered?

The solution might be simple: Adjust your price!

Learn how to price for profit using our Pricing for Profit Inspection Guide. This whitepaper will help you identify if you have a pricing problems and how to fix it.

Create Standard Operating Procedures (SOP)

Also, create Standard Operating Procedures (SOP). SOPs are step by step instructions written by a company to assist employees in completing routine procedures. They are necessary in a company to ensure operations run smoothly. The better your company’s SOPs are, the more efficient it will run. Create operating procedures that are simple, easy to read, and most importantly make them lead to a purpose.

Focus on Profitable Customers

Identifying profitable customers is instrumental to a company’s success. Once you completely identify your most profitable group of customers, focus your attention on them. Use your marketing funds primarily on you most profitable customers. A customer outside of that target market is still a viable customer, but they just shouldn’t receive as much marketing attention since they are not their primary and most profitable customer segment.

When maximizing your bottom line, start with your prices and pricing process. Access the free Pricing for Profit Inspection Guide to learn how to price profitably.

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Navigating Black Swan Events

Ever seen a black swan? The term was coined by Nassim Nicholas Taleb. A finance professor and former Wall Street Trader, Taleb created the term in his book, “The Black Swan”. It describes a situation that is both unexpected and hard to predict. Events like 9/11, Brexit, and natural events (like an earthquake) have caused people to question if it was a black swan event. Before we look at how companies should be navigating black swan events, let’s identify what black swan events are.

What Are “Black Swan Events”?

The most important question being asked is “what are black swan events?” A black swan event must have following three attributes:

  1. The event is extremely difficult to predict (at least to the observer)
  2. The event carries a major impact
  3. After the event has occurred, people will try to make it explainable and predictable (hindsight bias)

Black swan events might include the Asian Financial Crisis of 1997, Global Financial Crisis 2008, Oil Crisis 2014, to the more recent Brexit in 2016. Taleb states that a black swan event depends on the observer. For example, the Thanksgiving turkey sees his demise as a black swan, but the butcher does not.

Somehow, it’s confusing to call a black swan event a crisis and the other way around. Furthermore, not all black swan events are crises and not all crises are black swan events. 

Origin of a Black Swan

Taleb’s theory started from the Western belief that all swans are white. Until the year 1967, the Dutch explorer discovered the black swans in Australia. It was beyond normal expectation and profoundly changed zoology. Since then, the term “black swan” has been used to describe situations where impossibilities have been disproven and the risk effects when it happens.

Characteristics of Black Swans

In order to determine whether the Brexit event is a black swan, you would want to know the characteristics of black swans. Let’s examine all 3 attributes – unpredictability, widespread effect, and hindsight bias.

Unpredictability

Did the Brexit panic surprise you? What really makes Brexit unpredictable?

Brexit posed a huge challenge to the future of EU in general and specifically, the United Kingdom. Furthermore, Brexit led to a significant increase in power and responsibilities for local institutions. This would only add to the instability of EU.

Widespread Effect

Does it have a domino effect on all EU members states exits? Why is Brexit such a major trigger event?

Brits had been as a dominant country inside the EU, and it was argued that EU couldn’t exist in its current form without London playing a major role in the financial field. Brexit put EU in shock. Within a day, over 10,000 jobs were lost in the banks. Tariffs hikes the prices of automobiles. Inflation spiked. The effects of this event will be felt by everyone. It’s just a matter of when. 

Hindsight Bias

And now that it’s all over, some people have fallen into hindsight bias, known as a know-it-all-along effect. Brexit is widely thought as a natural expression of concern over immigration. So, is the recent Brexit truly a black swan event?  Your answer will likely depend upon your situation, but based upon the criteria set forth by Taleb, one could certainly make the case that it is.

Navigating Black Swan Events

How can we as financial leaders avoid becoming the Thanksgiving turkey? Taleb suggests that when navigating black swan events, you do not attempt to predict the unpredictable. Instead, Taleb iterates that our time would be better spent preparing for the aftermath or impact of negative black swan events and position ourselves to exploit the positive black swan events.

Think about preparing for negative events as just managing your business through the valleys. Since there is no certain way to determine how long the valley or trough will last, design a plan that considers possible durations (3 months, 6 months, 1 year, 2 years, 5 years, etc.). If the crisis resolves in 6 months, then what steps do you need to take? What if it’s longer? What if there is no foreseeable end in sight? How will those durations impact your financials (revenue projections, cash flow projections, etc.)? How much overhead can you have through these stages?

Where do you start when developing these scenarios and action plans? You need to seriously evaluate your key performance indicators (KPIs) to determine what you should be focusing on. Obviously, know the major KPIs in your industry. If you do not know them already, talk to key customers, investigate what competitors are using, and research benchmarks. After you have identified those KPIs, track and analyze any variance by utilizing trend tools, breakeven analyses, and what-if scenarios.

Take your plan and break it down into steps based on the different durations. You do not want to risk cutting too deeply because you need resources available to take advantage of when things turn around.

Strategies for Managing Black Swan Events

When navigating black swan events, it is important to note that crises provide a unique opportunity to get your house in order. Unfortunately, businesses have a habit of making rash decisions (and bad decisions) because everything is moving so quickly. They don’t identify how bad those decisions were until things start going downhill. As a result, there’s a lot of clean up to do during downturns. Think about Warren Buffett’s famous phrase, “You never know who’s swimming naked until the time goes out.”

What are some steps you can take to manage these downturns? Here are some ideas…

Weed the Garden

Start by weeding the garden or removing those unnecessary costs (i.e. overhead expenses). Overhead costs can easily get out of hand with revenue. Unfortunately, they tend to not decline as quickly when the sales drop off. Analyze your cost structure to convert more cost to variable vs. fixed. This will make sure that costs will stay consistent with volume.

Another method to weed the garden is to fix any hiring mistakes. You have a commitment to continue the business for your employees. Remove the people that don’t fit and don’t add value. When things pick back up, you will be better prepared to take on the right fit.

Look internally at your company. Analyze each part of your company and then make strategic decisions. Use our Internal Analysis to get started.

Finally, analyze your products and services. Compare their profitability. Remove those that are either unprofitable or not as profitable as the other products. Reallocate those resources to the products and services that perform better.

Do More With Less

Your company will always benefit from improving its productivity. However, it’s different for every business. Use the following formula to identify how you can improve your operations:

Productivity = Throughput ÷ Resource

When you discover the throughput and resources for your business, you can discover how to use less resource and generate greater throughput. This will improve productivity and therefore, profitability. With not as many sales, it’s a great time to evaluate your operations.

Reduce Leverage

During times of uncertainty, reducing leverage is especially critical. A few decades ago, a debt to equity ratio greater than 3:1 was considered high risk. Today, a risky investment is a debt to equity ratio greater than 4:1. Because of the speed and availability of information becoming more accessible, company’s comfort level with risk increases. However, this can increase the number of problems when negative surprises or black swans occur.

React Quickly

One of the biggest mistakes the company should avoid is that reacting too slowly. From a business perspective, you would want to react to new opportunities and then make decision quickly. Same thing with threats… Address those threats immediately and don’t delay on reacting.

Have you ever heard of the boiling frog analogy? A chef does not just throw a frog into boiling water. The frog would immediately jump out because it’s hot. To fool the frog, you put the frog in cool water and slowly turn up the heat. This incremental increase in temperature is hard to notice when inside the water. Don’t be the frog.

Have you identified the strengths and weaknesses in your company that you could either enhance or reduce respectively? If not, now’s the time! Access our Internal Analysis to get started.

Prepare

Based on the historical events that people come up with a preparation plan for upcoming disasters. This is what people do when it’s over. Analyze the situation and think of how we can avoid negative impacts or at least assess the risk of losses. If you think a black swan would cause you panic, then assess your attitude toward risks. By understanding that, you would know what type of investment to hold a long-term plan. One of the options for long-term investment can be assets, stocks, etc., even though they’re riskier but they come with high rewards. This is your time to consider what your company can do better when your sales are falling.

Avoid Pessimism

The main idea of a Black Swan is not to attempt to predict black swan event, but rather concentrate on guarding against its unpredicted effects. In an organization, especially risk managers, knowing that you have a plan for it will help you gain confidence to take advantage of any black swan events in the future.

When navigating black swan events, it’s a great opportunity to look under the hood. Take a look internally. Access our Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

Navigating Black Swan Events
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Navigating Black Swan Events

(Adapted from Jim Wilkinson’s article found here.)

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Free Cash Flow Definition

The business is like a human body, the body needs blood, the business needs cash. Investor look at Free Cash Flow to make their decision for investment. Interestingly, it’s not a number you can come up easily. First, let’s look at the free cash flow definition.

Free Cash Flow Definition

Many business owners, somehow, are not familiar with Free Cash Flow. The Free Cash Flow definition is cash generated by the company after deducting capital expenditures from its operating cash flow the amount of. In other words, after the company pays for employees, debts, expense, fixed assets, rent, plant, etc., whatever money you have got left (“left-over money“) is called Free Cash Flow.

FCF Example

For example, a company has $1 million cash flow from operating activities in its financial statement. However, they are spending more than $900,000 on purchasing property plants or replacing equipment. In this case, the investor will have to analyze the business to see if it was either a poor management decision or a high growth opportunity (i.e. more investment than cash on hand).

Even when a company makes positive Net Earnings, it doesn’t necessarily mean that company has Free Cash Flow.

Why is Free Cash Flow Important?

As it mentioned above, cash keeps the business running. If your company has Free Cash Flow, then what should the company be spending the money on? They could either hire more employees, invest in other assets, issue dividends, or make more acquisition. Before you make the decision, there are 3 main reasons you would consider FCF as a competitive advantage to maintain the business growth rate.

Free Cash Flow to Equity (FCFE)

FCFE measures the Equity value, referred as “levered” cash flow. It’s the amount of money available for equity shareholders after paying all expenses, debts, reinvestment. Also, consider free cash flow to equity as an adjustment for debt cash flow.

Free Cash Flow to Firm (FCFF)

FCFF measures the enterprise value, referred to as “unlevered” cash flow. Free cash flow to firm shows available cash to all investor – both debt and equity. In an Unlevered Discounted Cash Flow analysis, you would use WACC (Weighted Average Cost of Capital).

Valuation using Free Cash Flow

Other than using DCF method (Discounted Cash Flow), use Free Cash Flow to estimate the present value of a business.

FCF = Present Value.

By calculating free cash flow, you can interpret discretionary cash flow of the company. If FCF is positive, then the company has many options where to put the money in. Whereas if FCF is negative, then you have to analyze if it’s a one-time issue or a recurring problem. If it’s constantly negative, then the company has to raise more money (debt or equity) or eventually has to restructure itself.

Free Cash Flow Formula

The free cash flow formula is very simple. Look at the Cash Flow Statement. Subtract Capital Expenditures from Operating Cash Flow.

Free Cash Flow = Cash Flow from Operation – Capital Expenditures

Operating Cash Flow

Operating cash flow is the amount of money required to fund a company’s normal operation. It’s usually in bold and always show before Financing and Investing Cash Flow. You can also refer to Operating Cash Flow as “Working Capital“.

 Capital Expenditures (CAPEX)

Find Capital Expenditures (CAPEX) in the Cash Flow Statement, under Cash Flow from Investing Activities. However, Capital Expenditures is sometimes listed as Purchase of Property & Equipment. Capital Expenditure is different from Operating Expense (OpEx).

If you want to increase cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

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Good Budgeting Processes

Budgeting garners a variety of reactions. Some are annoyed that nobody ever wants to look at them or follow them. Others don’t know how to read them – so they just ignore them. Then there are some that just follow the mantra – everything is going to be alright. But we have seen some budgeting errors that resulted in over $1.5 Billion of deficit.

I recently had a conversation with a CEO that a budget was useless and he could manage his cash by using the bank. Needless to say, I was shocked. Over the course of my career, I’ve written hundreds – if not thousands of budgets, financial models, business plans. It’s been cumbersome, annoying, and I can’t tell you how many times someone has tried to ignore it. It’s a pain and I figured I could communicate it easier. Every company needs a budget, but it’s made to be so complicated AND no one follows it. So, I’ve created some good budgeting processes that you can apply immediately.

One of the budgets revolves around your cash flow. Remember, cash is king. If your cash is limited or you just want to improve it, then click here to access our 25 Ways to Improve Cash Flow.

What is a Budgeting Process?

“During every minute of the flight, I was confident I can solve the next problem.  My first officer, Jeff Skiles, and I did what airline pilots do: we followed our training, and our philosophy of life.  We never gave up.  Having a plan enabled us to keep our hope alive. There’s always a way out of even the toughest spot. You can survive.” 

Capt. Chesley B. Sullenberger III

A budgeting process is a plan for the greater plan that helps you make strategic decisions and steer your company is the right direction. A budgeting process (or plan) enables you to keep your company alive.

What A Good Budget Looks Like 

Often, I get asked what a good budget looks like. A good budget allows the manager or executive to have control over what is going on with the cash. It builds both accountability and ownership for the employee and the manager. A good budget also allows anyone to make quality decisions – rather than making decisions completely blind. In addition, a good budgeting process generates discipline – thus, creating empowerment and success.

“A well-constructed numerical estimate is worth a thousand words.”  

Charles Schultze, former Director of the US Bureau of Budget

What A Good Budget Does Not Look Like

Just as important, we also need to look at what a good budget does not look like. In my career, I’ve seen numerous budgeting problems or pitfalls when working in my own companies or with clients. There was a lack of accountability. Employees ignored the budget, didn’t follow it, and found ways around it. Additionally, the budget could only be applied to specific groups/managers as it was not a universal budget. Their budgets resulted in power plays and managers played games, instead of leading their company forward.

Budgets also take time. I’ve spent months, working everyday on just one budget. The current process for preparing a budget takes too long. I’ve also seen clients with budgets that were wrong from the beginning. They built their budget on faulty or unrealistic assumptions. Or they ignored their team members’ concerns. The team was fractured.

And they established goals that were too easy to reach or simply unachievable! Other clients spend all this time creating a budget only for it to be filed away when completed. The common budget process calls for a lack of follow up. Feedback on budget performance is either slow or nonexistent. CFOs, controllers, and budget directors can’t do their jobs effectively without that feedback.

Finally, executives and top management have hidden agendas or aren’t committed to having a budget. They’ve gotten this far without using a budget, so why need one?

Your budgeting process determines the success of your final budget. Simple mistakes on your process could result in a massive cash crunch. To improve your cash flow, click here to access our 25 Ways to Improve Cash Flow.

Good Budgeting Processes

There is also no right way to prepare a budget. Each organization must find its own process. But there is an easier way to prepare a budget with your own process. Everyone sees budgeting as the CFO’s or accounting department’s responsibility, but a good budgeting process involves the entire company. There are a couple key things that you need to look at as you evaluate good budgeting processes.

Have These Four Budgets

In fact, there are really four budgets you need to account for. These include the

You cannot get to the capital budget and balance sheet budget until the operating budget is complete. So that it your #1 priority! In addition, you cannot get to a balance sheet budget without a cash flow forecast, so add that to your to-do list.

Create a Micro-Budget

A great tool for measuring and controlling a specific or vulnerable area is the micro-budget. The micro-budget instills both focus and accountability into your company. Micro-budgets are single focus budgets used to measure and control one specific area. Some examples include:

  • Accounts Receivable
  • Marketing Activities
  • Construction Projects
  • Cost Centers
  • Unique Product Lines
  • Any Area Where the Plan is Vulnerable

Simplify Your Focus

Additionally, many accountants make their firms budget more complex than it needs to be. In fact, measure the complexity of your budget by four factors:

  • Operational Complexity
  • Diversity of Products and Services
  • Size and Geography of the Organization
  • Accountability to Others
  • Hallmarks of a Good Budget

Have Clear AND Measurable Goals

Budgets require clear and measurable goals. Without budgets, it is very difficult to achieve the business goals because each budget defines targets and measures the progress towards them.

Connect Activities and Profits

What prevents people from controlling costs or conserving resources is that they cannot see the direct connection between their job activities and their company’s profits. Part of your job is to help your coworkers and peers see how the work they perform impacts the bottom line. You can accomplish this by involving every employee in the budget development process. Ask them what they need to better accomplish their goals, issues they are seeing, or ideas to pursue.

What Your Budget Needs To Be

You can build a prudent, predictable, and well-conceived budget that creates a visionary plan and shares resources equitably. The process has changed. It’s now a team effort! Your team needs to know the concepts and budget process because (rule #1) the budget is a tool for decision making. It should not be a disconnected document that has little to do with the company’s actual business.

A Fiscally Prudent Budget

When you produce a fiscally prudent budget, it is achievable and balanced. It can also be measured using multiple non-financial metrics. The budget should both stretch employees and the organization as a whole. While it may leave wiggle room for flexibility, the budget should establish proper reserves where needed.

Remember, a fiscally prudent budget makes an investment in the present, as well as the future. The budget does not borrow from the future to fund today! If any one of the strategic goals listed on the budget is not met, then it should not put the company in financial distress. Finally, all the decision makers, executives, owners, and employees need to believe the budget is realistic, or else it risks not being a fiscally prudent budget.

A Well-Conceived Budget

In comparison, a well-conceived budget is created at a strategic level. It is developed in conjunction with the firm’s planning process. Furthermore, it utilizes the business acumen of an employee in the trenches. For example, an employee in the trenches is serving the customer or making the product. They are the first line of your company. They have continuous feedback built in that informs the leaders whether a strategy is realistic or not. The leadership has to be in tune with their front line. In addition, a well-conceived budget includes the interests of all the organization’s stakeholders. Then the budget is developed by consensus.

Conclusion

In the end, a good budgeting process enables you to better manage your cash flow and adapt when needed. If you are seeking more ways to increase cash flow in your company, download the free 25 Ways To Improve Cash Flow whitepaper to find other ways to improve your cash flow within 24 hours.

Good Budgeting Processes

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What is Cash Flow?

What is Cash Flow?

Cash flow is a term describing the money into and out of a business. This includes all transactions that transfer cash. Furthermore, the business’s sources of cash are separated into three areas in the company’s cash flow statements. Some of the different categories for money spent or earned to fit into the following:

Cash flow in vital to your business. It is the blood or oxygen for your company. Without it, there is no company.

What is Net Income?

Net income is a measure of revenue after subtracting all expenses. This means you take the total revenue for a period and subtract cost of goods/services as well as overhead. This gives a rough idea of whether a business made ‘money’ during the period. However, net income is not a good way to determine the cash usage in a business.

Key Differences Between Cash Flow & Net Income

Some of the key differences between cash flow and net income include the following:

  1. A business can be profitable and go out of business from lack of cash.
  2. A business can have cash flow but remain unprofitable.
  3. Cash flow is reflected on the cash flow statement and not the income statement or balance sheet.
  4. Analyzing cash flow is a way of planning for future cash needs.
  5. Investors can tell where the cash comes from and where it goes from statement of cash flows.
  6. Loans show up as cash on an income statement; Loans are shown as positive financing activities in the statement of cash flows.
  7. Watching cash flow helps notify a business of cash shortages and shows when to borrow money to keep operations going.

Click here to read more about Cash Flow vs Net Income.

What is Cash Flow?

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Recruiting vs Staffing

Difference Between Recruiting vs Staffing

The difference between recruiting vs staffing is that recruiting is acquiring talent to be a full-time employee. Whereas staffing is the hiring of an agency to provide temporary workers.

Recruitment / Placement

There are many recruitment agencies or placement agencies. It may also be referred to as a retained search. They typically charge a percentage of the hire’s salary as a placement free. Those agencies then collect resumes, interview, vet, and eventually get the client’s approval for hire. After the client approves and hires the recruit, the agency has finished their job. The client company not only hires the recruit, but is also responsible for the Social Security, Medicare, and employment taxes. In addition, those employees usually expect benefits such as health insurance and 401K.

Staffing Agency

Conversely, a staffing agency fills the gap when a client company needs a number of employees immediately but does not have the resources (capital) to afford all that is involved with hiring an employee. Staffing provides temporary workers that can be specialized to the client and bills them on an agreed to hourly rate

Hiring Process Through a Staffing Agency

A staffing agency has numerous job ads published to recruit the best talent. The agency then reviews the resumes, interviews potential candidates, and eventually, finds the perfect employee to fill a position at a client company. Depending on the demand, agencies can have a significant amount of employees that they can deploy.

Hiring a Staffing Agency

When hiring a staffing agency, it is important to assess your needs. Are you seeking specialized workers? Do you need 80 employees tomorrow or just 2? Different staffing agencies are going to be able to help you with what you need.

Advantages of Hiring Through a Staffing Agency

Some advantages of hiring through a staffing agency include seeing a potential employee in action before making the commitment to hiring them. Companies also are able to offset the costs of hiring to the staffing agency – essentially stretching their dollar. Additionally, companies are able to get a number of employees quickly, bypassing the weeks hiring usually takes.


Looking to hire a staffing agency to fill your accounting department needs? The Strategic CFO has recruited the best talent to serve your staffing needs. Click here to learn more about how we can serve you best.


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