Business Management Articles
Do You Know Where Your Cash Is?
Markham Board of Trade
January 2006
Do you really know where your cash is?
Do you know when and how much money is coming into your business this week? And do you know when and how much is leaving?
If you aren’t sure, then your business is vulnerable. A couple of late-paying customers or a rejection of your request for a line of credit could leave you unable to meet your cash commitments. This is why every business owner should have a cash flow management system in place that includes the following techniques.
- Prepare cash flow forecasts to estimate the amounts and timing of cash you expect to flow into and out of the business in the short term (weekly or monthly) and the long term (three to five years). These financial tools help you anticipate slow cash periods, budget the cash needs of the business, plan for equipment purchases, prepare for appropriate financing, and demonstrate to lenders your ability to repay loans.
- Prepare and review cash flow statements at least monthly to track your use of cash. By comparing results with your forecast, you can identify discrepancies and address them before they become problems.
- Accelerate accounts receivable to maximize the cash available to your business. Techniques include invoicing daily, offering discounts for early payment, issuing monthly account statements and monitoring accounts receivable every month.
- Act immediately on outstanding accounts to improve your chances of getting paid. Send a reminder invoice or contact the customer by phone. And enforce late payment interest penalties.
- Monitor accounts payable to facilitate cash flow – while maintaining good relationships with your suppliers. Review payables every month to identify potential problems. Utilize worthwhile early payment discounts and schedule payments such that you don’t pay suppliers any earlier than required.
- Calculate the average age of both payables and receivables (payables or receivables/sales x 365) and compare them to see if cash inflows/outflows are balanced.
- Reconcile monthly bank statements to confirm cash inflow and outflow.
- Control spending to keep expenses in line. Monitor costs/sales. Review expenses every quarter and eliminate those that don’t show a return. And before taking on any major new expense, determine first if it will benefit your business.
- Prepare for future financing needs so you aren’t caught short of cash. Establish a contingency fund by depositing money every month into an interest-bearing account. Or negotiate an overdraft option with your financial institution. Or line up financing prospects. As well, watch your debt/equity ratio; ideally, it should be about 1:1 -- if it’s inching up, take preventative action.
With a comprehensive cash management system in place, you’ll know exactly where your cash is and where it’s going -- and you can be confident that your business won’t run out of cash while you’re on watch.
John Moore, CA, is a partner of BDO Dunwoody LLP (www.bdo.ca). BDO, one of Canada's leading accounting and advisory firms, helps entrepreneurs and family businesses succeed. If you have questions about this article, or you would like to receive BDO's Tax Factor newsletter, contact John in the Markham office at 905-946-1066 or e-mail jmoore@bdo.ca.
