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Certified Public Accountant



Guest Post of the Month for December 2003

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The Futility of Managing From Your Bank Balance
Philip Campbell, CPA

If you needed to know what your cash balance was right now, would you look to your accounting system for the answer or would you call (or go online) with your bank?

Your answer to this question reveals a lot about whether you have the cash flow of your business under control or not.

The correct answer is to get your cash balance from your accounting system. Not the bank!

The bank balance and the cash balance are two different animals. Rarely will the two ever be the same. Don't make the mistake of confusing them.

It's a prescription for failure and frustration. You reconcile your bank balance... you don't manage from it.


A quick example will highlight the difference between the two balances.

Let's say you call the bank or go online to get your bank balance. The bank says you have $10,000 in your account.

What business decisions can you now make about the amount of money you have available to you? How can you use the information you just received from the bank to make important business decisions?

Can you go to the bank and withdraw the $10,000?

Let's say you just received an invoice today for $9,000. The vendor indicated you could deduct a 2% discount ($180) if you pay within five days. Can you write the check today? Should you write the check now and save yourself $180?

The problem here is you don't have enough information to answer these questions. You don't have your cash balance yet. You only have the bank balance.


What if you had written a check for $8,000 three days ago? Has it cleared yet? Has it been deducted from the $10,000 balance you just got from the bank? If it hasn't cleared yet, then an $8,000 check is on its way to the bank and will be deducted from your bank balance.

When it gets there, your bank balance will go from $10,000 to $2,000.

Look at the impact this has on the questions you just asked yourself.

Knowing there is an $8,000 check about to be deducted from your bank balance changes everything. Now you know you cannot withdraw the $10,000 and you can't write a check for $9,000.

You can answer the questions now because you have a more accurate view of your real cash balance. Your accounting system would already have deducted the $8,000 when you wrote the check.


Your accounting system records all your cash receipts and all your cash disbursements. The accounting system is where the "books" of your company are maintained. This is your bible. This is where your cash balance is maintained.

When you print a check from your accounting system, it is immediately deducted from your cash balance. Even as the check is sitting on the printer, it has been deducted from the cash balance on your books (the same thing applies if you use a manual check register).

It has been deducted from the books even before you have put it in an envelope to mail it.

Has it been deducted from your bank balance yet? No.

It will not be deducted from the bank until it is presented to the bank to be paid. You have to mail it to your vendor, they receive it and deposit it in their bank, the banking system routes it to your bank, and it is finally paid by
your bank.

Now the check is deducted from your bank balance.


Don't try to manage your business from the bank balance. It is an activity that will create mistakes, confusion and frustration.

Use the cash balance on your books to manage the cash flow of your business. Then reconcile that balance to the bank balance each month to make sure both balances are accurate.

This will help you avoid making some very serious and very expensive mistakes.


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