Ever wonder why cash seems so tight all the time? Your business is doing well, but it feels like you are riding on the edge when it comes to cash (and cash flow).
Every business owner or entrepreneur goes through it… usually many times along the path to growing a successful company.
Shining a Light on the Issue
A lot of the confusion and frustration starts with the fact that profits Do Not Equal cash.
At least not in the short term.
There are 5 to 7 key drives of cash that could be the reason cash is so tight right now. The question is do you have a way to quickly shine the light on the driver of cash that needs attention.
Here's a fun conversation between a business owner and their outside CPA that highlights the issue.
Business Owner: Why does my cash flow suck?
Outside CPA: Your cash flow sucks because you have an average of 76 days of sales sitting in your receivables. That's way too high in your business. Something is out of whack.
Business Owner: Holy cow, you're right. Accounts receivable, which should be a very small number, has gone through the roof. I thought we had the receivables under control. About a year ago accounts receivable had skyrocketed. So we put a special focus on it last year and got it under control. I had Jane in accounting spend almost full time on getting accounts receivable down.
After your email, I talked to Jane in accounting. She thought that after the cleanup work had been done last year that responsibility had gone back to John and Steve in project management. So I talked to John and Steve in project management, and they said no, they thought Jane in accounting was going to be continuing to do the work to collect receivables.
So the bottom line is no one's collecting receivables.
I just pulled up the accounts receivable aging and there it is. Our aging has gone crazy. Thank you so much for pointing that out. I guess one lesson for me is I should pay attention to whether we're collecting receivables!
I've been focusing on getting new deals and creating revenues and profitability, and it has been going great. And I was perplexed as to why it is that we don't have enough cash to pay vendors. We'll get on it right away and fix it.
Shining the Light on Cash Flow
Like this discusion highlighted, there's a good chance there is one driver of cash that is creating your problem. So the big question is which one is it?
Profitability, accounts receivable, inventory, accounts payable, capital expenditures, debt service, owner distributions, prepaids and deposits?
Which driver of cash flow needs to your attention this month?
Read this post on understanding the different drivers of cash. It will help you shine the light on the area that needs your focus.
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