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Cash Counts

“How are you going to pay for this?” I asked? My client responded, “I still have checks” which meant he didn’t have any cash. He had the ability to write a check but no cash to back it up. I can’t stress enough how important cash is in any business operation. The reality is, cash counts! It makes a huge difference in the ability to continue operating from day to day. Without cash, employees get nervous, vendors hound you, and owning a business becomes miserable.

So why do most small business owners lack cash? Where is the money if I’m selling products or service? Why isn’t there more cash in the bank?

These are all valid questions. It comes down to managing the cash in the company. Just like employees, cash has its problems too. Sometimes it calls in sick. Other times, it shows up late (actually quite often), and for some reason cash isn’t as productive, it doesn’t do as much work as you would like it to do. So to manage cash, manage it no differently than you would deal with your staff.

The key is that you need to make sure you are earning enough money in the company. So the primary element to making sure you have cash is make sure you are earning a profit by reviewing your accrual based financial statements. This is important to understand, a good accrual based report will make sure all bills and invoices are complete and up to date. Now you have a position of knowledge to work from. If you are making a profit, then it comes down to a matter of reviewing why you lack cash.

Sometimes the cash calls in sick. This means that one of your customers can’t or will not pay you. It is important to communicate with them and find out why. In one situation, I found out that the customer wouldn’t pay the invoice because she never received the document. It turns out the invoice was never mailed; it was still sitting in the bookkeeper’s draw because she was called away on that day and didn’t get back to mailing the invoices. You would be surprised at some of the reasons why customers will not pay you for your services. Here a good internal accounting control system would have caught this before it became a problem.

Sometimes cash shows up late. This is typical because customers pay late or have payment cycles that do not match your cash needs cycle. Get to understand your customers, create alternative approaches to deal with their cash issues. Options include allowing them to pay with credit cards, using a third party to lend money, even using factoring to get money to you. Just like dealing with employees, you have to be firm in holding the line on getting paid (showing up on time); have more than just one option for them to pay their invoices.

Once the cash is in the account, look at your bills and don’t just start paying them based on dates due or who is your best vendor. You need to be cognitive of what is coming up in the future, if you know you have a payroll and taxes due in a few days, reserve enough funds to cover that obligation. Use the balance to pay your vendors. Call your vendors and explain to them that folks have not paid you yet so it is difficult to pay them. If you lack enough funds, make token payments to your vendors, this tells them that you haven’t ignored them or vacated your responsibility. The key here is communication.

Be careful when buying big ticket asset items. Make sure these are funded from an appropriate source, if a long term asset(s); use long term money such as loans or capital funds to purchase the asset(s). Use your profitability to pay down the debt as you have excess money.

Managing cash is no different than managing employees. Vigilance in your duty eliminates that ‘I don’t know how to pay for this’ response. Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you. If interested in my services as an accountant/consultant; click on My Services in the footer of this article.

 

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About David J Hoare (420 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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