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Rescuing your business from the cash-poor houseBy Steven PullaraQ. Our sales are growing rapidly, but we are constantly out of cash. How can we solve this problem? A. To solve this problem, entrepreneurs must understand the financial statements that act as business "scoreboards" and the relationships between these statements.
The three key business financial statements are: • Balance sheet: This statement shows a company's financial position at a point in time. It is a "snapshot" of the company's assets (resources) and the liabilities (obligations) financing those assets, and the equity (net of assets and liability amounts) of the owners in the business. • Income statement: This shows a company's profitability for a period of time. The profits shown are reflected in an equation as follows: profit = sales - cost of goods sold - operating expenses. • Cash-flow statement: This shows the net change in a company's cash for a period of time along with the cash balance at the beginning and end of that period. This statement is like a summary of the company's checkbook showing the sources and uses of cash. The income statement shows the "rewards" of a growing business and the balance-sheet and cash-flow statements show the "challenges or risks" of a growing business. The income statement shows increasing sales, gross profit dollars and net profit; however, the balance sheet of a growing business shows increasing inventory, accounts receivable, fixed (or long-term capital) assets and liabilities. Because a growing business is reinvesting its profits in inventory, accounts receivable and fixed assets, there will be less cash on hand, as shown in a cash-flow statement. Growing, profitable businesses can run out of cash and be forced to close. This is especially true when a company pays its costs and operating expenses before collecting cash from its customers. Usually it takes a combination of the following to improve a company's cash flow: 1. Improving the company's working-capital management, which means better managing or reducing the company's accounts receivable and inventory levels and trying to finance these with vendors and suppliers for as long as possible. Specifically, management can credit-check customers and limit the extension of customer credit, request advance deposits or payments from customers, accept credit-card payments, bill customers in a timely manner, send monthly statements to customers, offer customers early-payment discounts, turn over delinquent accounts for collection, reduce inventory levels by selling old or obsolete or slow-moving inventory by discounting, and obtain longer time periods for payment to vendors and suppliers. 2. Reducing a company's investment in fixed assets by leasing or delaying the timing of capital acquisitions. 3. Restructuring the company's finances by financing long-term assets with long-term loans and short-term assets with short-term loans. 4. Contributing more money to the business (from the owner) or delaying or reducing distributions to the owner(s). 5. Improving the profitability of the business. Slowing the sales growth rate, for example, by increasing prices will improve cash flow. Improving productivity, buying at lower costs, and reducing or delaying the timing of payments of operating expenses can also improve cash flow. This month's answer is from Steven Pullara, a partner and certified public accountant at Smith & Gesteland LLP. He teaches financial management for the Wisconsin Small Business Development Center. madison.com ©2009 Capital Newspapers. All rights reserved. |
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