Hey, Jennifer Dawn with Profit Plus Advisors and this is a question that was emailed in. The crazy thing, it was actually emailed to me from three different people. I thought, “Okay. If this many people are asking the question, we definitely should attack it here in a quick little blog.” The question that I’ve been receiving is:
“What’s the difference between an accounting system and a cash management system?
There’s definitely a big difference between the two. Many business owners think that it’s the same thing, but it totally is not.
An accounting system is going be something like QuickBooks, QBO, Quicken, Zero, Sage, or Peachtree accounting…if that’s still around. All of those different systems are accounting systems and they are a way of accounting for every dollar that comes into your business. As it comes in, it gets put into an account. Then as it goes out of the business, we’re accounting for where all of these dollars are going.
But accounting really has nothing to do with managing your cash. Managing your cash goes more to profitability and do we have money left over at the end of the day to pay ourselves, turn a profit and be a financially healthy company. A cash management system looks at all the money as it’s actually received. An accounting system would actually keep track of money that hasn’t been received. Those are your accounts receivable. It’s money we’ll receive one day, but you got to keep track of that. That’s where the accounting system comes in.
But a cash management system says, “All right. Here’s the money that we’ve actually received. Now, what are we gonna do with that money.” We’re going to take it and divide it up into these different buckets. Maybe this piece goes to operating expenses, this pieces goes to taxes or tax liability. The cash management system takes the money, divide’s it up and is really responsible for making every dollar that you have coming into that business work for you. That’s a cash management system. It doesn’t even take into account your, let’s say, accounts receivable or your accounts payable. It doesn’t have anything to do with depreciation. Those are more accounting functions.
The beauty of a cash management system is that it’s your actual money. When you go to make a financial decision, you’re making that decision based on money that you have in specific accounts, so you’re making, I think, a much more accurate and healthy decision because you’re looking at the cash of the business. Cash is like the blood in the veins as it goes through. It’s the life source of the company and so the cash really manages it, where an accounting system is accounting for it so you know where it’s all going.
I hope that helps you know the difference between a cash management system and an accounting system. If you’re wondering if you need one or the other, the question is no. You need both. They both work together. You shouldn’t have just an accounting without cash management. You shouldn’t do cash management without an accounting. You need them both. They both work together to really create a financially healthy company.
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