Do You Know Where Your Cash Is?

Have you ever asked yourself the question,

“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 and gives the business owner, banks and other investors a better perspective of what contributed to the net profit or loss reported. 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.

Anyone running a business needs a clear vision of how his/her business decisions affect the finances of the company to achieve the desired success desire. Cash is King. 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 certainly take control of you.

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

1. Invoices issued upon the shipment of product or the delivery of services are delayed because the supporting information has not been processed in the accounting system on a timely basis.
2. Past due receivables are increasing because customers are experiencing cash flow issues themselves.
3. Customers are paying their invoices short because of product quality issues or invoicing errors.
4. Inventory is increasing faster than sales because of over purchasing inventory components in comparison to current production needs.
5. Staffing is increased to meet short-term demand without any confidence that the demand will continue to support the additional cost.

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. This report should identify the customers management must contact to resolve quality and past due collection issues. It should also identify excessive inventory issues and other cost drivers that may impact the financial results of the 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 to the bank for payment 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 to understand where the cash will be during the next 13 to 26 weeks. Establishing cash flow projections is simply using a few basic principles with your intuition and knowledge of the business. Adjust for any significant changes you expect to happen that are different from the past and never project revenues that you cannot be fairly certain will occur as this will create a false sense of security. Finally, review the projected cash balance by week to determine any unexpected shortfalls. 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. In addition, it will provide the management team with a course of action to grow the business profitably while knowing where the cash is.bu

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