Let me guess: Your profit and loss (P/L) statement has been in the black for months, yet a quick look at your bank statement tells you that you've got only enough money in the bank to cover four--maybe six--weeks of operations. Don't fret, my friend. I see this narrative play out all the time, particularly among new entrepreneurs.
The root of the issue is that you're basing the company's health on its P/L statement, not on its balance sheet. P/L statements show revenue and expenses, but only a balance sheet lists everything a company owns and what it owes. As a CFO, I usually find the answers to cash issues buried in a complete balance sheet.
Turn the page for some common places where a disconnect can occur between net income on the books and actual cash in the bank--and how to correct them.
Accounts receivable. It's busy season, and you're spending cash like water. Meanwhile, people who owe you money aren't paying in a timely manner (shocking, I know). For example, a builder needs to buy materials and pay workers in the summer but won't see payment until the houses are finished months later.
Securing a line of credit to tap as an emergency fund is smart. Even smarter is lining it up when you least need it; i.e., when you have plenty of cash on hand. You'll get a better rate and a better deal from the bank.
Then heed Mark Twain's warning: "A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain." If things start to rain on your business, take the cash out of the credit line and park it in a separate bank account. This way, the bank can't suddenly cut you off from that money.
The fix: Offer prepayment discounts if customers pay all or a large portion ahead of starting the job. Then be insistent on getting paid. Sometimes a phone call is all it takes to move your invoice to the top of their pile.
Accounts payable. I worked with a Florida golf course that raked in money during the winter but had trouble finding the cash to buy fertilizer in the summer, when far fewer people golfed. Why? During the high season, management forgot to prepare and budget for expenses that would occur during the off-season.
The fix: Pay for materials needed for the off-season during your flush months, and ask for a prepayment discount. That's what we did at the golf course, buying fertilizer at a reduced cost ahead of the summer.
Fixed assets. New companies tend to go on sprees, buying furniture, computers, equipment, even buildings to ramp up production, set up new offices or expand. And poof! Just like that, there's no cash for day-to-day operations. I once had clients who poured all of their money into purchasing a warehouse and were in a world of hurt when they needed cash and the banks said, "No way."
The fix: Finance or lease everything you can, matching the asset's life with the term of the debt. That way, three to five years later, when, say, a computer is out of date or a machine wears out, you can immediately turn around and upgrade to new equipment.
These are just a few of the ways a seemingly profitable business can run into a cash crunch. To avoid these scenarios, get help from an accounting pro to build a financial model that shows you the whole picture, not just your P/L. The truth it reveals may sting, but the pain will pass when you've got the cash in hand.