Saturday, August 25, 2012

Do you Know Where your Cash is?

Not knowing where cash is going is one of the challenges business owners have in their business. As a CFO Consultant many business owners ask me "I am doing all of this business, where is the money"?

Cash is the lifeblood of any business. It is the business's most valuable asset. Without cash the business is crippled. The business cannot operate effectively and trouble ensues. Business owners need to know where their cash is going because if it is going to or being tied up in unproductive places it will cripple the business. Cash, being a company's most valuable asset needs to be effectively utilized in order to produce the maximum amount of earnings and return on assets. The business owner needs to know where cash is going!

Cash can hide and become unproductive in one or more of the following places:

  • Accounts Receivable - When you don't have a credit policy that you adhere to, cash comes in slowly and gets hidden in accounts receivable
  • Prepaid Expenses - The psychology of some business owners is that they like to pay for things in advance so they can get the particular expenditure out of their mind. This is a potential hiding place and in most cases an unproductive hiding place for their cash.
  • Inventory - For retailers, distributors and manufacturers this is a common hiding place. Slow moving inventory must be sold so that the money can be reinvested in the inventory that does move.
  • Fixed Assets - Sometimes cash is tied up in Equipment, vehicles or machinery and the business owner does not realize the impact or makes the decision to pay cash for a fixed asset when the return on their inventory and services rendered is far greater than the cost of financing
  • Accounts Payable - Similar to the psychology of business owners with regard to prepaid expenses noted above business owners pay bills too fast and cash gets consumed prematurely and unproductively.
  • The Cash Conversion Cycle is too slow - The Cash Conversion Cycle is the time period between the outlay of cash to make a product or provide a service and the collection of cash from the sale of that product or service. The objective is to receive payment for the final product before paying for the inventory and/or expenses of production and/or the expenses of selling the inventory. If you understand your Cash Conversion Cycle you can create strategies and work with suppliers to most productively meet your needs.
  • Lower Profit Margins - Selling prices could be too low. One way to check if selling prices are too low is by the number of customer complaints. If at least 25 to 35% of your customers are not complaining about your prices then your prices are too low! Costs of services can also be too high and impact margins. Always negotiate with suppliers or streamline processes.
  • High Overhead - A high overhead base can always kill cash flow. Also check for high owner salary. Business owners can abuse their business by taking too much salary. What would an outside board of directors pay you as a business owner given their knowledge of all the factors and contingencies in the business?
  • Employee Theft - 80% of all theft is employee theft. No one thinks it can happen to them, yet it happens all of the time.

Take a look at this list and see where cash is hiding!