Most of us know and understand that every business needs to create and use a proper-and meaningful-Chart of Accounts that describes each relevant category of transaction that impacts either the Balance Sheet or the Income Statement, also known as the Profit & Loss Statement, of the business. Then, the business needs to keep accurate and up-to-date Income Statements and Balance Sheets, and on an accrual basis in the vast majority of businesses. Accrual Basis accounting enables you to see how your business is doing not only in terms of actual receipts and disbursements, but also as to receivables earned but not yet collected, and obligations incurred but not yet paid.
A proper Income Statement shows those disbursements that are generally deductible expenses for income tax purposes, but does not show certain types of disbursements, such as principal payments on loans, or the cost of acquiring a major piece of equipment. The Balance Sheet gives you a snapshot of the business' worth, based on what are called "Generally Accepted Accounting Principles", but there is a lot that a Balance Sheet does not tell you about the true condition of your business. In short, Balance Sheets and Income Statements are exactly what your accountant wants and needs to see in order to properly prepare the business' tax returns, but they don't tell you all of the story you need to know in order to run the business on a day-to-day basis.
The other "set of books" is a Cash Flow Plan. We use the term "Plan" to distinguish it from a Cash Flow Statement, which is a history of cash flow from prior periods. Conversely, the Cash Flow Plan is a projection of future cash flow activity. In its simplest (and most useful) form, it is a listing of all sources and amounts of cash that you currently have on hand, amounts that you can reasonably anticipate receiving on a given day, week, month, or in some other short term period, and a listing of all payables of whatever kind that will need to be paid during that same period.
The anticipated cash receipts may be from any source whatsoever, including borrowed funds, sale of equipment, and items that may not be just ordinary income. Likewise, the anticipated payables, or disbursements, can be due to any source, including principal and interest payments on a loan, or the purchase of computers equipment that may not be ordinarily not deductible from income taxes all in one year. To put it simply a Cash Flow Plan will answer questions that are vital to the financial health of your business; how much cash do you have, how much can you reasonably expect to come in within a given period, how much will you be required to pay out in that same period, and how much will you have left (or will you be short)?
It is a plan that gives you a clear picture of whether you will have enough cash to fuel your business needs on a real time basis. It is a plan that should be reviewed and updated daily-sometimes even more often, depending on the kind of business you're in. It will shine a light on areas of strengths and deficiencies on both the revenue and the expense side of your business. It will help you anticipate and plan for specific needs and requirements of the business.
Knowledge is power, even if it sometimes involves bad news. You can't respond to something you don't even see coming. More businesses fail for lack of cash than lack of profits.
Bottom line: If you don't have one, create a Cash Flow Plan today. No business can realistically operate without two sets of books!