Bad news: A company can increase sales and profits and grow itself out of business related to the subject of cash flow.
Where does it go? An owner of a company with $66 million in sales asked us a profound question, “Can you tell me why my company had more cash in the bank when our sales were at $20 million than we have today at sales of $60 million?” Upon investigation, the question was easy to answer. We fixed his cash flow problems. Cash is often tied up in growth companies in the following areas:
- Trade receivables
- Employee theft
- Debt service
- Inadequate terms with vendors
- Income taxes
- Increased overtime and labor burden
- Inadequate long-term lending
No surprises: It’s imperative that owners put their foot down and demand no surprises regarding this important subject. There may be the occasional inconsequential surprise, however, it’s simply not acceptable to have a large cash surprise.
Special skillset: Cash management, sometimes called “treasury management” includes managing cash, with the ultimate goal of managing liquidity and mitigating its operational, financial and reputational risk. Bookkeepers and controllers typically do not have the training and knowledge necessary for proper cash management. They can be trained and utilized for research and documentation, however, the overall management of cash often takes a professional with a degree from a reputable university plus a couple of decades of experience.
Managing components: There are often dozens of components of proper cash management that must be viewed simultaneously into cash management tools. Some of the components may include:
- Collections from customers
- Payments to vendors
- Earning of discounts from vendors
- Debt service on notes payable – principal and interest
- Proper and timely distributions to owners to pay income taxes
- Software lease renewals
- Payroll and payroll taxes
- Funding of 401(k) and other pension obligations
- Purchases of inventory
- Governmental compliance obligations
- Labor burden management, such as overtime, etc.
- Annual property taxes
- Notes receivable
- Significant changes in federal, state or local income taxes
- Insurance renewals – General, liability, health, key person insurance, etc.
- Sick leave accruals that are regulated by the government
- Owner distributions
- Purchases of vehicles, equipment, computers, software, etc.
Most of the above, plus cash management subjects that are unique to every business, must be accounted and planned in advance of their occurrences.
Looking into the future: Some owners like a rolling 13-month view of cash. Others like a 90-day view. The future view of cash is subject to the owner. This cash discipline, however, must be enforced by the owner and the company’s accounting and the management team must not allow any large surprises for the owner.