Cash Book Basics: What is a Cash Book?
So your new business is off to a flying start. But there’s no point in making money unless you can keep track of it. Your cash book helps you do that and if you learn to use it effectively, it will tell you what aspects of your business can grow. It’s simply how you keep track of money coming into and going out of your business – a record of cash spent and cash received.
Your cash book records cash transactions as well as bank deposits and withdrawals. There is likely to be a lot of these, which means they can be hard to keep track of but it’s vital you do so. Your cash book should have two columns, a debit column and a credit column. The difference between the two represents cash in hand. So the cash book gives you an overall view of the business.
Single-entry cash book versus double-entry cash book
You may have heard of a single-entry cash book and a double-entry cash book but what’s the difference? Single-entry accounting is far simpler, it records
- the money spent or received,
- the date on which it happened and
- the specifics of what that money was for
A single-entry cash book allows you to see a snapshot of your cash balance and it’s simple enough for you to track everything just using a spreadsheet. But it doesn’t show you the balance of other accounts such as revenues and expenses. This means you’ll need to do the same process with those.
A double-entry cash book records additional information. You need to be specific about the money received, where it came from and which account it went to. This will be useful when you go to reconcile your accounts against your bank statements later. It will also help you get a bigger picture of the state of your business.
While the double-entry system is used in big business, it might not necessarily be the right choice for small businesses. It comes down to the complexity of your business. Indicators showing you need a double-entry cash book include:
- Large number of employees,
- Many different customer accounts
- Large inventory
- A lot of suppliers you pay on a regular basis
As your business becomes more complicated you may need to track more information, and that’s where double account book-keeping comes into its own.
What information does your cash book give you?
Your cash book is a snapshot of your organisation’s financial success. It tells you how strong your financial position is, where your money is going, and what income you’re generating. It gives you a way to track the history of your business, look at regular deductions and see where changes or improvements can be made.
In short, your cash book is used to develop your cash flow. It’s vital to have a vision of the ebb and flow of money coming into and going out of your business and it’s surprisingly easy to do.
- First, list cash inflows you expect to collect during the period, including customer payments, interest earnings, dividends, sponsorship, grants and so on.
- Then add the cash outflows from the items listed in your expenses forecast including supplier payments, salaries, loan repayments, credit card payments, and taxes. Consider regular, irregular, and seasonal payments such as rent, repairs and maintenance as required, and inventory purchases.
- Start with an opening account balance, and add the revenue less the expenses for each weekly or monthly period to find out your likely cash position.
If you know what you’re likely to spend on a new product, new direction, equipment purchase or even expansion you can add that detail into your cash flow forecast. You will have a picture of how your cash position might change depending on those decisions. Of course, investing in risk forecasting and cash flow software like Reep will streamline this process and give you even more confidence. Using all the data at your fingertips to generate a prediction for your business will tell you what you can do next. Why not start a trial of Reep today?