Root Causes of Low Cash Balances

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You can download our Seven Mistakes Cash Flow Guide at this link.

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Transcript:

Hello there. It's Jonathan Ankeny from Small Business CFO with another edition of Your Money and Your Business.

Earlier today, I had a call with someone who was dealing with their financial reports and tight cash flow, and they were trying to figure out how to get out of a tight situation.

And during this call, the question was posed to me, “Well, can this be summarized by saying that we have a cash flow problem?”

And I said, “Yes and no.” There are basically two ways of looking at cash flow.

The first one is that there's the type of cash flow problem that is manageable, and it's manageable because it's a timing issue.

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For example, delayed inflows.

You've got money that you're expecting in, you were expecting in that has not come in yet, such as a large deposit for a contractor or perhaps customer payments are getting delayed. There's it's a timing issue because the money coming in has been slowed down. On the flip side of things, you may also have accelerated expenses.

 Let's just say that you have a big insurance bill that's come due or some other large expense where you've been given an incentive to pay it down early.  

 You go ahead and do that, and you get a good discount on it, but it reduces your cash balance and it reduces it quickly.

 So these are timing issues.

On the other hand, you've got situations where there's a structural problem with your financials.

To summarize it this way, if you're not making money on your P&L, you're going to have cash flow issues because your net profit at the end of the day is negative. So you're running out of money that way. And a lot of businesses can lose money over time just by the slow drip, drip, drip every month of having money that goes out the door.

So the solution to these are going to be very different. If it's the first situation where it's purely a timing matter, you pick up the phone, you do emails.

For money that's slow coming in, you see what you can do to accelerate things. Perhaps you have a client that is experiencing their own cash flow issues. Well, see if we can work out an installment agreement so that the money comes in.

If you are in a situation where you have to accelerate payments out, well, figure out a way so that you can time it, work it out with the vendor, things like that. If you're in a relational business or if you take a relational business approach to things, then it's probably going to work fairly well. But that's how that works. On the other hand, if it's a structural issue, then there's an issue that that really has to be done on the financials.

And we have to do what we call profit alignment, which is we take a look at your income that's in and we take a look and see what the expenses are like, what your variable costs, your fixed costs are, things like that, and work it in a way so that there is money left over at the end of each month to add to the bottom line.

So keep this in mind. You know, if you're low on cash, is it because of timing issues or is it because of structural issues?

One of the reasons why we do cash flows for our clients is because we want to make sure that they don't ever end up in emergencies to begin with, and we check and make sure that they don't end up in trouble either because of timing or issues or because of structural issues.

So, of course, you know, in conclusion, if you have any questions, drop me a line, and I will be happy to answer them.

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