Disappearing Cash and How to Manage it

“The income statement that my accountant gave me says that I am making a nice profit, but I never seem to be able to have enough cash.”  Does this sound familiar?

First of all, if you are wondering these things, you are not alone. Here are some common issues that may affect the cash flow of a business:

  1. Invoices issued are delayed because the supporting information has not been processed on a timely basis.
  2. Customers are paying their invoices short or delaying payment because of product quality issues or invoicing errors.
  3. Inventory is increasing faster than sales because of over purchasing components compared to current production.
  4. Staffing is increased to meet short-term demand without enough confidence that the demand will continue.
  5. In a project based operation, you are not properly reconciling milestone billings with the actual expenses incurred.
  6. Failing to plan for quarterly sales tax or income tax payments.
  7. Not adequately financing long-term assets.
  8. Taking distributions without leaving adequate cash reserves.
  9. Theft, waste or not managing expenses.
  10. Past due receivables are increasing because customers are experiencing cash flow issues themselves
Become disciplined to look to the accounting system for the daily cash balance and not the online bank balance.  Your bank balance 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.  Relying on your accounting system cash balance, which should be periodically (no less often than monthly) reconciled to the bank balance, will allow you to avoid serious and expensive mistakes.
Establish a process to create cash flow forecasts, that are continually modified and updated as new information becomes available. Maintain a fairly short window of time for the forecast, such as the next 4 to 6 weeks, so as to keep it realistic.  Establishing cash flow projections is simply using a few basic principles combined with your intuition and knowledge of the business.  Adjust for any anticipated changes and never project revenues that you cannot be fairly certain will occur.  If cash is particularly tight, have your staff provide a daily balance first thing in the morning, every day, with an updated forecast.  This will seem like a daunting task at first, but it will become much easier if it becomes a policy and a habit.

Understanding your cash flow will give you peace of mind and help you start to take control of the financial side of your business.

photo credit: 607 – Money Whirlpool – Texture via photopin (license)

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