Why Is My Cash Always Flowing Out

Mar 06, 2011

see my blog at:  www.BruceBenesCFO.com/my-blog/

 “I don’t understand it.  Why am I making a profit and still need to put cash in the business?” 

Not too long ago a business owner made a comment like this to me.  Sound familiar?  It is a real challenge to understand why a profitable business continues to need cash.  The answer comes from both the income statement and the balance sheet.  The income statement provides a historical view of the company’s performance:  the sources of revenue and expense and the resulting net profit or loss reported.  Outlining changes in the balance sheet over the same period of time identifies how the profit was used, or, how the loss was financed.

Common issues impacting cash include:

Increasing Sales

As sales increase, often the cost related to the production (labor and material) is paid as the items are produced.  The revenue, however, is not collected.  So as sales increase, additional cash is needed to fund the ‘extra’ volume of production.  Tracking the “working capital” will provide the trend on this cash need.

Accounts Receivable Change

If AR overall becomes “more” delinquent, cash will be required.  The reverse also holds true.  If the level of delinquent accounts comes down, cash will be provided.  Tracking the “Days Sales Outstanding” provides the trend on this cash activity.

Staffing and Expense Levels

It’s well understood that as expenses increase, the requirement for cash may also increase.  But, as expenses increase, it should be done with the idea of increasing revenue.  Sales staff are hired to increase sales.  Office staff should be hired in response to increased revenue.  If expenses are increasing at a faster rate than revenue, then cash will be required.  Tracking the “Break-even Point” will provide information on the risk of expenses compared to revenue.

Inventory and Equipment Levels

Buying inventory or new equipment will require cash today in exchange for the opportunity to produce more in the future.  Using current inventory or selling off equipment or other assets will assist in providing cash.  Tracking “Inventory Turns” ratio shows how well the inventory is being managed.  Regularly reviewing the fixed asset schedule will identify additions and possible items to sell off.

Prepaid Expenses

Certain expenses, like insurance premiums, require a deposit.  These deposits are then expensed over the upcoming year or some other time in the future.  Paying the deposit uses cash without an immediate impact to profitability.  Reviewing the prepaid schedule will identify these items to make sure they are being expensed properly and that the overall expense is competitively bid.

Debt Levels

Accelerating debt payments or having a short-term loan may increase the need for cash in the business.  If overall profitability is down, there may not be enough cash to pay all the principal and interest on the loans.  New loans may incur the larger debt payment before the expected increase in sales materializes.  It’s important to track debt to equity ratios and free cash flow to make sure debt levels are manageable.

As a B2B CFO®, we are able to provide the reporting and analysis on these and other key ratios needed to manage the cash of the business.  Perhaps more importantly, our experience can provide insight on how to correct problems that may be causing the “cash crunch.”  As a part time CFO, we can create and monitor a regular cash flow budget and cash flow projection to provide a “forward look” to help avoid the surprise call for more cash.

Understanding your cash flow gives you peace of mind and helps you start to take control of the cash side of your business.  In addition, it provides the groundwork and resources to grow the business profitably.  Give me a call at 817-729-0688 or email me at BruceBenes@B2BCFO.com if you would like to discuss your cash flow issues.


More from Bruce Benes…

About the Author

Bruce is an experienced CFO who integrates the operating processes with financial reporting resulting in improved efficiencies and business profitability. His focus on communication and education helps build organizations that understand their key success factors and how to challenge the status quo to drive targeted and measurable improvement. These efforts help all team members understand how their actions impact cash planning and budgeting with an increase in profitability.

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