Where Did All the Cash Go?

We hear this all the time from small business owners. They look at their Profit & Loss statement (a.k.a. Income Statement) which shows all this activity in their business, and yet their Balance Sheet (and checkbook) shows little to no cash!

So where did it all go?

A big challenge for a lot of business owners is understanding the difference between profit and cash flow. While the P&L may be showing growing sales and profit, the owner may notice that their cash balance is shrinking or that they are struggling to meet payroll.

Depending on your business, here are a couple of the most likely places to look for your cash:

1. Accounts Receivable: this is a big one for a lot of our contracting clients, but can be especially true for anyone dealing with large companies.

   Let’s say you’re an electrical contractor working on some new construction. A typical situation might be that your crew finishes work during the first week of the month, you bill your client at the end of the month and your client doesn’t pay that bill for 60-75 days after they receive the invoice. That’s about 3 months since you completed the work AND PAID YOUR OWN CREW not to mention probably paid for supplies for the job! You’ve been acting as a bank for your client’s business.

2. Inventory: if you’re a retailer you probably see your products on the shelves as well as in your back room. What I see are big piles of cash. Don’t fall in love with your product. It’s sole purpose is to provide cash for your business and if it’s not selling, then it’s just cash sitting on your shelves instead of in your bank account.
3. Interest: again, another common culprit for small business owners. Depending on your situation, it may be interest on credit cards you used to start the business or perhaps on a tapped out line of credit you have with your bank. In any case, these ongoing interest payments (along with principal payments) can be a significant drain on your cash resources.
4. Accounts Payable: while you might believe in paying all your vendors on time or ahead of time to get a couple percent discount, keep in mind that you holding onto cash for an additional 2-4 weeks could be the difference between staying in business or going out of business when things get tight.

One thing I didn’t mention above, which may be more the case for a business that is not profitable, is under utilization of your labor. We often hear phrases like “I have to keep my guys busy.” Think about how crazy that sounds! You’re not in business to “keep your guys busy and on the payroll,” you’re in business to make money. It never ceases to amaze us how often owners can lose sight of this very basic principle.

Your number one job as owner of the business is to make sure your business has cash to survive.

One of the tools we introduce early on to most of our clients is a 90-day cash forecast. This helps give the business owner a 3-month window for any cash shortages and provides tremendous comfort for the owner that the business will have cash for the next 90 days. If you would like a copy of the template we use for this, send me an email at  . . . . .@ACCOUNTING-ALACARTE.COM

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