Where’s the Cash? (Part 2)

“I’m supposed to be making money. But look at my Profit & Loss statement. Where are the dollars? They’re not in the bank!”

We started answering the question “Where’s the cash?” in the previous posting. Here are three more answers to help you put in place any missing basic building blocks of business:

3. Too much inventory. Increases in inventory require cash. When inventory doesn’t turn into sales, it starts to look like cash sitting on shelves, which it is. Good inventory management doesn’t come from just thinking about it hard; it comes from a system. Find out the system for figuring the Economic Order Point of each of your items. If you have hundreds or thousands of items, then use the 80/20 rule to focus on the minority of items tying up the majority of your cash.

If you’re still confused, ask someone like me. But quit acquiring inventory based on some seat-of-the-pants method.

4. Paying vendors more quickly than collecting from customers. When you pay vendors too quickly, you become a bank, supplying your cash for them to use as they wish. I am not suggesting deliberately becoming a deadbeat, but check your accountant’s practices. Some like to pay bills as they come in just to get them off their desk. But it’s better to pay as late as can be done without incurring late fees or bad feelings.

5. Paying down debt. Payments on the principal portion of debt do not appear as an expense on the Profit & Loss statement. Depreciation is the method that roughly approximates such payments. But what about paying down debt early? That’s a good thing, unless doing so starves cash required for meeting demand for products and services. Payments on the principal portion of debt can explain what happened to some of the cash.

Enhance your leadership by wrapping your head around each topic above and in the previous posting so you can answer “Where’s the Cash?” for yourself, and specifically to answer it by means of an eight-week projection. Answering the question by looking at the checkbook balance is looking the wrong way – backwards. Are you on the loose or noose?

For additional small business leadership ideas visit Small Business Advocacy Center.

on Facebook on LinkedIn