GUT CHECK!
You’ve determined that you are profitable, but you still have no cash… it could be growing pains!
Growth demands cash, and can eat it up faster than you budgeted for. Purchasing assets (such as equipment or inventory) can be critical to growth but consume cash quickly. Often times businesses are investing employees’ time into new projects, and that time equals cash. Make sure that you understand all that your company is investing in growth, then ask yourself – is it truly necessary?
Start with these questions:
If yes,
- How much have they grown?
- What is the average amount of time it takes to get paid?
If your receivables are taking more than 60 days on average you need to speed up accounts receivables. Make it a number one priority to get the average time down to 30 days, then to 15 days if possible. Spend your time on getting your most current receivables in faster, while trying to get the oldest next. |
| If your receivables have not grown, move on to the next question. |
If yes,
- How much did it cost?
- How did you pay for it?
- When will it become sellable product?
Each industry is different on the amount of time it takes to turn inventory into sellable products, but be sure that you aren’t spending cash that you don’t have on inventory that will not pay itself back within 90 days. Charging inventory that can not be paid back in 120 days is cause for alarm! If you’ve done this, you should look at borrowing money or injecting cash to right yourself. |
| If no, move on to the next question. |
If yes,
- Was it critical to your business growth?
- Did you budget a realistic time period to pay it off?
Most equipment has a 5-10 year life span, so if you are feeling a cash crunch, you want to delay any equipment purchases that will not pay themselves off in 2-3 years. |
| If no, move on the next module. |
Are your Receivables growing?
Return to the Cash Flow module