Where’s the Beef (Cash)?

In talking with business owners I often hear, “I am making a profit but I don’t know where the cash is?”

Many business owners tend to manage their business strictly from the income statement.   An income statement is very important to a business as it provides a historical view of what transpired in the company over a period of time.  However, the income statement does not necessarily translate into an increase or decrease in cash.  Understanding how the income statement results will impact the cash flow of the company is equally important, yet often ignored.

Every business owner should have a clear understanding of the financial implications of his/her business decisions to increase the chance of success.  If you don’t take control of your cash, it will most take control of you.

Here are some common issues that may affect the cash flow of the business:

  • Invoices that should be issued are delayed.
  • Past due receivables are increasing because customers are experiencing cash flow issues themselves.
  • Customers are paying their invoices short.
  • Large inventory purchases. Inventory is increasing faster than sales because of over purchasing inventory components in comparison to current production needs.
  • Staffing is increased to meet short-term demand.

Monitoring these issues is not a difficult thing to do.  A simple report incorporating income statement and balance sheet information every month will focus management in the right areas and help to improve the cash flow of your business.

Next, management must become disciplined to obtain its cash balance from the accounting system and not the bank.  Your bank statements will not show checks that have been written and not presented nor will they show receipts that have not been deposited at the bank.   These unreported bank transactions should represent the difference between the bank balance and the cash balance reported in the accounting system.  Relying on your accounting system cash balance, which is periodically reconciled to the bank balance, will allow you to avoid serious and expensive mistakes.

Finally, management must establish a process to create cash flow forecasts. Establishing cash flow projections is simply using a few basic principles with your intuition and knowledge of the business.  Further analysis will identify priorities that management must focus on to resolve the issue identified in the forecast and avoid real problems in the future.

Understanding your cash flow will give you peace of mind and help you start to take control of the financial side of your business.  Never run out of cash.

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