Cash is the lifeblood of any business venture. Without it, entrepreneurial ideas are not turned into reality. With it, a company is able to prosper and grow. As the saying goes, “Cash is king.”
At times, however, that king’s crown, big or small, can block your view of the real picture that is being painted. Cash can create the mirage of profitability and a healthy company, when in reality your company could be a short time away from having a dried up bank account.
“So,” you ask yourself, “how can I analyze my cash to ensure that I don’t become a victim of the cash mirage?”
There are two important analyses that will give you clarity regarding your company’s cash.
First: Intimately understand your company’s “Working Capital Cycle”. Depending on the nature of your business, there are multiple components of the working capital cycle.
- The first has to do with sales and accounts receivable. Think, “How much time elapses from the time I make the sale (or provide the service) until I actually receive payment from the customer? Am I collecting payment in a manner that is both reasonable to the customer and safe for my company’s cash needs?”
- In manufacturing companies, the second component involves inventory. The question to ask yourself here is, “How long does it take for my company to sell a product after it has been produced/purchased?”
- The last component relates to accounts payable. Ask yourself, “Am I taking advantage of the payment terms that my vendors are giving me? Or am I always paying invoices soon after I receive them?”
There are many variables that go into determining what your working capital cycle should be and how each of the three components mentioned above should combine to give you that result. A good part time CFO can give you meaningful clarity as to what your targets should be.
Second: Put a cash flow forecaster into place. A rolling 13-week cash forecast, displayed on a user friendly business dashboard, will provide needed insight into your future cash availability and whether or not your current cash balance will be sufficient enough to get you through large cash outlays such as payroll and inventory purchases. Your part time CFO can help you nail down an accurate and timely cash flow forecast that identifies upcoming cash inflows and outflows. You will then be able to identify what actions to take now so that you can count sheep when you lay down at night as opposed to sweating while counting dollars, wondering if there will be enough to go around.