Sounds Of Minus [Marginal Cash Flow] - Silence Like A Cancer Grows

INTRODUCTION:

I spoke yesterday about the concept of marginal cash flow and how you can be generating more sales and profit but still be producing negative cash for each dollar of income.

Now I realise I might be banging on about it but today I want you to recognise the signs that you have a problem with your small business that might indicate you are suffering from this situation.

Here are some symptoms that might cause you to sit down with your small business accountants and determine how to turn your business into a cash positive generating machine.

Figure 1: Recognise danger in your financial statements or your business could drown in its own debt.

1. Profit & Loss Statement Says We're Making Money But No Cash

This is something that many cannot understand but is the classic sign. Remember that it is possible to go broke making a profit and a business that takes too long to generate sales into cash will see potential buyers give the entity a much smaller business valuation so they can acquire it for a song. The first thing they will do is fix the marginal cash flow situation and turn it into a valuable operation.

2. Overdraft Is At Its Limit

If your overdraft is always right near its limit, this indicates you have your cash tied up in other places for too long unless of course you are making a loss.

3. The Bank Won't Lend More Money

Despite having what looks like a strong profitable business on paper, you find that the bank won't lend you any more money even with solid interest cover. You also find that you can't borrow for much needed capital expenditure.

Figure 2: If the bank keeps saying "no" when profits are strong you need to find out why.

4. You Don't Have A Handle Of What Spare Cash Is Available

If you don't understand what spare cash is on hand or what your true bank balance is at any point in time it's time to act now! Most small businesses these days reconcile every single day and predict what cash they will need to have for the rest of the month and the next month and through careful planning with their small business accountant Sydney, right out for 12 months with three way budgets and cash flow forecasts.

5. Lending Conditions Have Been Breached

When you borrow you do so under certain terms. These are known as covenants. If you breach these terms (repayments etc.) then you need to understand why this is occurring.

6. The Company Is Reluctant To Pay A Dividend

The financial statements your small business accountants Sydney have given you show a profit and high retained earnings in the balance sheet and yet the company cannot to afford to pay a decent dividend. This means working capital requirements are probably very high. Again a three way budget which includes a cash flow forecast will identify this.

Figure 3: Being able to pay a dividend will keep your shareholders very happy!

7. Debtors & Stock Levels Are Always Very High

If you find yourself or your CFO always whining about the high levels of debtors and stock then you need to see if these can be reduced. Always look at key performance indicators such as debtor days, inventory days and supplier days.

CONCLUSION: 

If you see any of the above signs in your business get help now! As I say, when you are presented with a set of financial statements from your small business accountants demand they explain the drivers between profit, cash and the balance sheet for that particular period.

Better still ask them to work with you to fix and monitor the situation.

You will be so glad you did!