Many people confuse accounting and finance and reasonable so. They both deal with numbers and money. When running a small business though, only one really matters. Yes small businesses still prepare accounting financial statements and still go to CPAs and use these reports to report taxes, etc. However, if you are running your small business using pure financial statements as a guide you may be hurting yourself more than you know.

The main difference between accounting and finance is that accounting deals with reporting business operations according to an accrual method governed by specific though flexible rules. Finance is more concerned with cash flow which to a small business is its lifeblood. Without appropriate cash flow a small business will go bankrupt in a matter of months. Many mangers or owners aren't even aware of their cash flow. You may see a profit of $10,000 for a certain month but if your cash flow is negative you better have a line of credit or some other means of financing until you get more cash. How could you have a negative cash flow even when profits are high? Well what if you bought a lot of inventory and when you sold it you sold most on credit. Accounting makes you record the sale as revenue even though you may not see the money for months.

It is simple to compute cash flow from accounting profit with just a few adjustments most of the time. You have to add back non-cash expenses like depreciation, take out capital expenditures, and adjust for working capital. For example, if your receivables were $5000 last month and this month the balance sheet shows $3,000, then your cash flow is up $2,000.

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