Why are profitable businesses short of cash?
You work hard and your business is profitable but you still cannot find a way to access cash from your business. What are you doing wrong? I was recently joined by Caitlin Vivian, CPA, to discuss why this happens to business owners and what changes you can make to easily access cash from your business and at the same time, increase its value.
Caitlin explains that the fundamental discrepancy that affects a business’ cash flow are the numbers reflected on a balance sheet versus an income sheet. Simply put, when a sale is made, revenue is recorded immediately but the sale is often extended on credit. Your business my invoice a client over a 30-90 period, or you may only do your accounting quarterly. That timing difference is not allowing your sales and revenue to correlate properly. The major liability for a business in this position is that you are extending credit to your customers despite having to be accountable for your own business payments. The result? Over drafted accounts, lines of credit, debt and interest payments.
How can you alleviate the pressure? Caitlin has a few suggestions that will help you keep cash in the bank:
- Use cloud based accounting software such as QuickBooks. Many common programs offer tools that allow you to access your cash flow statements in real-time, making it easier for you to know how much revenue you will be bringing in after a week or two.
- Maintain your business’ budget. If sale and revenue numbers get out of hand and you are unable to track them effectively, your accounting process will be less efficient.
- Float or reserve cash until your payment arrives. If you know that a payment is coming, make sure you have other sources to make up for not actually having it on hand. This will keep your business in the black and away from credit and debt.
- Be proactive with your finances. Update budgeting and accounting to monthly intervals and use live data so you do not fall behind.
Consider that without cash in your accounts, there is less value in your business and this will have implications if you ever want to sell. You are also not alone – many owners have difficulty keeping cash in their accounts despite the obvious success of their individual businesses. Caitlin and I have a system that helps you, the business owner, ensure that there is cash on hand. Would you like to find out more?
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