Who Moved My Cash?
Written by the Controller | CFO Advisor Team
We live in a business world where it is often said “Cash is King”. How much cash do we have available at the bank? How much cash can we acquire if operational changes demand more cash? These are important questions a small business owner ponders on an on-going basis. To generate this cash, business owners focus their effort on the monthly profit and loss statement. The assumption: As long as the company is profitable everything will be fine. On the surface that appears to be strong logic, but there is more to it than that.
Small business owners must also focus on the Balance Sheet. If Cash is the King then the Balance Sheet is the Castle that Cash lives in. Many outsiders to the organization, such as the company’s banker, will look at the Balance Sheet to determine the company’s ability to repay loans and its potential for future longevity. Profitability aside, if the company does not have the ability to meet its short term obligations, it will soon fail if new capital resources are not available.
The main purpose of most businesses is to turn their products and services into cash… but they fail to manage this important resource. As the saying goes, make your cash work for you. The key, however, is how and where you utilize cash and then measure the return. Spending cash on long term, slow yield items will hamper a company’s growth effort or cripple its ability to meet its current obligations. Assets should be viewed with an eye on how they can generate cash. In addition, how quickly you turn your products or services into cash will increase your performance. One area of improvement can come from a further tightening of its credit policy. Effective cash management will enhance profitability.
Too often, the small business owner loses track of important Balance Sheet accounts that will build long term stability. The company’s goal should be to turn these non-cash assets into cash as quickly as possible. So then, what Balance Sheet accounts should small business owners view with an eye on how they can generate cash?
- Cash
Proper cash management will yield additional cash in the form of interest. If a company is fortunate to not have short term loans it can invest this cash in interest yielding vehicles. If not, the paying down of lines of credit will reduce the amount of interest due. Either way, making your idle cash work for the business improves your bottom line. Therefore, when funds are being held for other than immediate transaction purposes, they should be converted from cash into interest-earning marketable securities. Invested cash yields more cash.
- Accounts Receivable
Accounts Receivable tracks the amount to be received from a customer for goods or services sold by the company. Collection equals cash. Guidelines must be followed to be certain cash is received when due, per the company’s terms. Establishing a documented credit policy and adhering to it will assure timely collection of the balances due. Components of the credit policy should include:
- Sales Terms
- Late Payment Penalties
- Obtaining & Evaluating Credit Information
- Assigning and Approving Credit Limits
- Collecting Past Due Invoices
- Record Keeping
- Inventory
Inventory can be in the form of raw material, work-in-process, or finished goods. The finished goods are made available to be sold to customers and, upon collection, turn into cash. Sold inventory leads to cash. Inventory is generally considered the least liquid current asset and therefore it should provide the highest yield to justify the investment. Inventory should not be overlooked in proper cash management. Along with warehouse costs for storage, bringing in these raw materials before required, will lead to an unnecessary cash outflow. Small businesses should institute a just-in-time policy to monitor the proper stock levels. Slow moving inventory should be evaluated to determine its resale value. Some cash today is better than none tomorrow.
- Fixed Assets
Fixed Assets are property used in the operation of a business, such as buildings, machinery, fixtures, furniture and equipment. Fixed Assets that can assist in cash generation are generally machinery and equipment used in the production of finished goods that will be resold. Products produced leads to cash. It is important for the small business to keep its equipment operational so that it can continue to produce product. Idle equipment will not generate cash. Measuring equipment utilization will help determine whether it is providing an adequate return.
- Accounts Payable
Accounts Payable tracks the amount owed to creditors for goods or services purchased by the company. Accounts Payable is a loan of cash. A company’s vendors can be significant providers of short term credit. Proper cash management must not only include inflows, but outflows as well. A decrease in accounts payable is a decrease to cash. Therefore guidelines must be followed verifying that over or early payments do not occur. A small business owner should document how these payments are made to its suppliers as they significantly impact the company’s use of cash. Included in the procedures should be when and if cash discounts should be taken.
The bottom line: A company can track the movement of yesterday’s cash on their Cash Flow Statement but to truly understand what tomorrow’s cash flow will look like, a careful eye must review the Balance Sheet.
BIK’s outsourced Controller|CFO Advisors can help you manage your company’s cash flow.
The BIK Controller|CFO Advisors:
Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt
Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically. Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209.
Visit our web-site at www.bikcfoservices.com.