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7 Financial Facts To Know About Your Business
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Article 2: Cash Flow: Questions To Ask
The most critical part of managing your business’ finances is managing your cash flow. Optimizing cash flow starts with finding the answers to three questions, says John Barrickman, the president of New Horizons Financial Group, a consulting group specializing in small business lending:
1. Where is your cash trapped? Cash can be tied up in various places in your business. Barrickman recommends a thorough review of your balance sheet with the following in mind:
Do you have non-productive cash sitting in multiple non-interest bearing accounts? Do you have a large volume of uncollected accounts receivable? “This represents a large lake in which huge amounts of cash can be trapped,” says Barrickman. What about unrecognized costs and inventory — another potentially large pool of trapped cash? What about fixed assets? “Do you really need fancy office furniture, a high-end computer or other frills that aren’t providing a return on your investment?” Barrickman asks.
2. Where does cash come from and where does it go? The best tool to help you answer this question is your cash flow statement, says Barrickman.
“The cash flow statement unwinds the timing differences between profits and cash introduced by accrual accounting and classifies cash flows as operating, investing or financing flows.”
If you’re having cash flow problems — in other words, more cash is going out of your business than is coming in — you need to find out what’s causing this and what you can do to change it.
“Look at your cash flow over the past three of four years,” Barrickman suggests. “Did cash come from ongoing operations and earnings, liquidations of assets or borrowings? Did it go to fund growth, purchase fixed assets, fund inefficiencies (like slow receivables or inventory turns) or support your lifestyle?”
3. Can you improve your existing cash position and ongoing cash flow? The final step is to look for ways to improve your cash flow.
“Start with your current processes for managing cash,” says Barrickman. “Can you process receipts and collect receivables faster by using bank tools like lockbox and electronic payments? Banks offer a broad range of treasury management tools that even small businesses can use to increase their available cash.”
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