Where Is My Cash?

Man use calculators and documents that calculate expenses in the home office.

Cash moves in mysterious ways. In today’s post, we crack the code for growing companies so you can know where you stand. 

My business is growing. Where is my cash? 

When a company enters a growth period, sometimes cash does not follow.  In fact, sometimes the company runs out of cash despite its growth, then fails.  This happens because new revenue adds new expenses that must be paid for sooner than the company gets paid for the work.  The money used to keep cash from dipping during the period between the payouts and the receipts is called “working capital.” 

Consider a project-based company that does a one-month job for $25,000.  To deliver those services, the company may pay for $5,000 of materials at the beginning of the month, then pay $10,000 to employees throughout the month on two paydays.  The total cost is $15,000, so the profit is $10,000.  Yet the invoice for that month’s services may not go out until month-end.  Further, it could be another 30 days before the $25,000 invoice is paid.  

The job’s profit shows up on that month’s income statement.  Those profits turn into cash, but only later.  At the end of the month, only the expenses have been paid.  Cash is down $15,000, even though profit was $10,000.  Only after two months – when the invoice is finally paid – does the profit show up in the bank account. 

Now imagine that the same company is growing fast and performs ten jobs like the one described above.  If one job causes a $15,000 cash dip, that may be ok.  But if the company performs ten jobs at the same time, then the cash dip becomes $150,000.  Now that is a major issue. 

Tips for managing cash as you grow. 

Business owners have several ways to achieve a healthier cash balance and increase their working capital.   

First, check on collections because reducing your collections cycle increases your cash.  This is often-times overlooked because (1) people are busy, (2) most customers pay eventually, and (3) nobody likes making collections calls because they think they have to act like Moose and Rocco.  But most businesses can and want to pay their vendors on time, and there is nothing wrong with reminding them.  In fact, the issue is commonly something clerical.  As for customers who are truly struggling to pay, the operative phrase is, “the squeaky wheel gets the grease.” 

Second, consider opportunities to change invoicing policies.  The more you can collect up front, the better.  This is especially true in services businesses, which typically perform services on the invoicing cycle described above.  If half of the cash is collected up front in that scenario, then cash begins to move up on a shorter timeframe following the revenue growth.  It can support the materials purchases, and payroll costs, so cash does not get consumed as the work is performed.  Another method to shave a few days and ensure regular payments is to encourage customers to pay electronically, or even better, using autopay.  

Third, consider opportunities to change vendor payment policies, especially if you are paying for inventory.  Are you paying bills as soon as they come in?  That is simple and works great if your company is doing fine with cash.  But if you are looking for ways to increase the balance, why not hang onto that cash until closer to its due date?  Setup a process to track unpaid bills and their due dates.  Then pay them closer to the due date.  Further, check on which vendors may give you better terms.  They may be willing to extend payments to 30 days from 15, or Due on Receipt.  The worst they can do is say no. 

Finally, talk to a bank about a line of credit to support working capital.  There are plenty of options out there, and any banker should be able to work with you to find something as long as they deem your company credit worthy. 

Concluding Thoughts 

Cash moves in mysterious ways until you understand the mechanics of your working capital cycle.  Having a clear understanding of how your company uses cash can give peace of mind to the business owner.  And knowing how to improve the cycle can have a tangible benefit.   

As a business owner, however, there comes a point at which somebody else should be digging into those issues for you.  So if you are ready to take yourself out of that finance seat, then let us know and we will make it happen. 

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