“Got Cash?”
Amy E. Gibb, MBA, CFPTM
Your business has been named “The Fastest Growing Business” in the county. The phone is ringing off the hook and you just landed a big order that could double your sales. This is the best thing that could happen to your business – or is it? Businesses fail everyday because they run out of CASH. How can a growing company run out of cash? And how do you keep this from happening to you?
What is the difference between “Profit” and “Cash”? “Profit” is what you pay taxes on and “Cash” is the balance in your checking account. Sounds simple, but profitable businesses can “go broke” because they run out of cash. “Profit” – over the long run – tells you if you are making money. “Profit” is what is left over after we add up sales, subtract expenses, and account for depreciation.
Why is cash so important? Cash is the lubricant that keeps a business running everyday. It keeps the doors open and the phones ringing. “Cash” is all money coming in minus all money going out.
So why should you care about cash if you are profitable? Are your sales growing? Do you borrow money? Are your receivables or inventories growing? You could be in trouble; you could run out of cash! What happens to the cash? A growing company spends cash to buy more inventories, hire more workers and pay growing expenses. You might have great sales, growing profits but no cash because your customers haven’t paid you yet (receivables) or you used your cash to buy inventories, buildings or machines. If you have no cash to pay your employees, vendors and creditors, you fail.
How do you make sure you don’t run out of cash? First, have your accountant prepare and explain a cash flow statement. How much cash does it takes to run your company. Companies that require more inventory, employees or machines need more cash. Now, what happens if you grow? Have your accountant prepare a statement showing a 20% increase in sales and a corresponding increase in assets, inventory, receivables and expenses. How much more cash will you need to grow by 20%? Most business owners are surprised that a $100,000 increase in sales requires that they have an additional $50,000 cash to invest in their company to support payroll, inventory and receivables.
How do you stay out of trouble? Understand the cash flow of your company. Don’t grow unless you have the cash. Accumulate excess cash in the company instead of taking it as salary and dividends. Get a line of credit to support growth and seasonality. Make sure you are profitable. Aggressively manage and collect receivables. Don’t build up excess inventory. Maintain good vendor and creditor relationships. Don’t buy new equipment unless you research the cash effects.
Still need help understanding cash flow? Call your CPA or business financial advisor, ask another business owner, talk to the Small Business Development Center, take a class or read a book. Understanding cash flow will be a key component to your business success.
Now, the phone is ringing off the hook…. Got Cash?
President, Money $ense
Amy@MoneySenseSolutions.com, 303.494.5362
Amy E. Gibb, President of Money $ense specializes in making businesses more profitable. She may be contacted at 303.494.5362, or for more information go to www.MoneySenseSolutions.com.