We've all heard it said: cash is king. And in these days of tight credit and a generally "down" economy, that's more true than ever. Whether you are looking for a loan, or just trying to keep your business afloat, it's hard to overestimate the importance of knowing where your cash is -- and were it will be in the near term future.
Regardless of the exact type of account, the best place for cash to be is "available for use." But often, businesses find their cash is tied up, stuck in a bottleneck that causes it to come in too slowly or go out too fast to meet the needs of the business. Here are some of the main places that can become cash traps, stopping you from growing -- or surviving at all.
- Your customer's bank: Are your receivables growing faster than your revenue? This can be due to collections issues, problems qualifying customers, or invoices that don't go out in a timely manner.
- Your vendor's bank: Are you paying your vendors too soon? Can you improve the pricing you get by asking for multiple bids, or negotiating better deals?
- Your warehouse: Is your inventory growing larger and larger each month? Do you have good processes in place to tell you what is actually selling, what needs to be ordered, and when and how you should move out aged inventory?
Once you have identified where your money is now, it can be very helpful (and is required by many lenders) to create models showing where it's likely to be in the next four quarters. You do this by identifying and modeling all the major drivers of your cash flow, for example revenue projections, seasonality of the business, average number of days to collect receivables, inventory turns, average payables outstanding, and the timing of major asset purchases.
CFO Selections can help you manage your cash flow by quickly providing a clear picture of your current cash position, strategies to improve cash management, an objective assessment of how current and potential lenders will view your situation, and a roadmap modeling multiple scenarios so you can anticipate problems and devise solutions.
About Tom Varga
Tom is the Founder and Managing Partner of CFO Selections. He has 20+ years of experience in finance and other executive positions at a variety of companies. Tom enjoys seeing business owners overcome challenges and take their companies to the next level. If he ever had spare time, he would spend it hiking, climbing, and teaching mountaineering.