My Bottom Line is Good, so Why Don’t I Have Any Money in the Bank?

“My bottom line is good, so why don’t I have any money in the bank?”

As the owner of a business, have you ever asked yourself this question when looking at the most recent profit and loss statement that your accountant has provided alongside your latest company bank account statement?  It is not uncommon for owners to be frustrated by the lack of cash on hand despite receiving a GAAP-based profit and loss statement that shows strong profit margins and a bottom-line well above any balances they have seen on their bank statements for, well, ever.

The issue is that while the business is generating satisfactory profit margins in producing and selling their products and services, there is no one in the business focused on managing the timing of the actual cash flows occurring between the company and its customers, vendors, lenders and shareholders.

Understanding Your Cash Flow Statement

When addressing the issue of cash flow management, its best to start with the statement of cash flows (SCF). This is the critical third leg of the monthly financial statement package that every owner should be getting from their accounting staff, along with the profit and loss (or income statement) and balance sheet.  The SCF provides a road map that links the results in the profit and loss and the balance sheet by starting with the net income (or profit) produced by the company’s operations as reflected on the profit and loss and then tracing how the cash generated by those profits ultimately get into the company’s bank account.

The first section of the SCF looks at how changes in the working capital accounts of the company, representing primarily accounts receivable and accounts payable, affected the flow of cash from operating profits.  Typically, increases in accounts receivable over a given period is a use of funds and reduces the amount of those operating profits that get into the bank. Alternatively, increases in accounts payable are a source of funds and result in a greater amount of operating profits getting into the bank.

The second section of the SCF depicts how investments, typically in fixed assets purchased for use in the business, affect cash.  As most owners well appreciate, it takes ongoing investments in new operating machinery and equipment to both replace aging assets and to support and fuel the growth that healthy companies strive to achieve.  It is this critical use of cash that in fast-growth periods can exceed the cash being generated by operations, which requires management to find other sources of cash, which is detailed in the third section of the SCF.

The third and last section of the SCF reflects sources and uses of cash from financing activities.  These are typically represented by loans from third-party lenders such as a firm’s commercial bank or contributions of cash from new or existing shareholders.  It can be tempting to rely on increased lines of credit from bankers or other third-party loans, but the negative impact on cash flow from reduced profits due to higher interest costs and larger future principal repayments make this source of cash less desirable than improving the cash flows outlined in the first section of the SCF.

Take a Deeper Look at Your Accounts Receivable Aging

It is not uncommon for a company experiencing significant reductions in their periodic cash flows relative to their reported operating profits to be unaware of gradual or even abrupt increases in their accounts receivable due to one or more customers slowing down the payment of their invoices.  It is critical for every company to have an experienced staff person focused on the company’s accounts receivable aging to ensure that past due balances are promptly addressed with the delinquent customer.

Review Your Accounts Payable

With accounts payable, it is important that the internal staff person responsible for processing vendor invoices and scheduling payments are well-versed on the need to ensure that no invoices are paid early.  I have assisted more than one company where the accounts payable person was not well-trained and was processing and paying invoices just as quickly as they could to get them off their desk so they could move on to other administrative tasks.  Another often overlooked means of improving cash flow is by negotiating longer payment terms with vendors or negotiating credit terms with vendors that have historically required immediate payment of purchases with cash or credit card.

Adjust Your Processes & Seek Help

Ultimately, whether it’s being more attentive to accounts receivable invoice aging to ensure more timely receipt of customer payments or negotiating longer payment terms on purchases from vendors, the over-arching goal is to reduce the delay of cash represented by operating profits on the company’s profit and loss getting into the company’s bank account.  By implementing more disciplined processes around the monitoring and timely collection of accounts receivable as well as the proactive management of accounts payable terms with vendors, a company can oftentimes avoid having to rely on more expensive sources of cash, such as third-party loans, or, even worse, having to scale back growth plans because of the unavailability of sufficient cash to purchase the fixed assets required to support those plans.

All B2B CFO® partners have significant experience helping companies of all sizes in a wide variety of industries and are very knowledgeable in the many approaches available to businesses for improving cash flow.   Our firm’s motto, Cash. We help you get it™, reflects our partners’ focus on this critical aspect of successfully managing a business.  If you would like to learn more about how we can help you get more cash to fund the growth of your business, please contact any of the partners in the region listed above at your earliest convenience.