Situation: “Our Company shows profits every month and yet we continue to be short of cash, how can that be?
Suggestion: To most non-financial individuals, the terms profits and cash are used interchangeably, which is incorrect. The phrase “cash is king” is very true. Let’s help to find where cash is likely hiding.
1. Accounts Receivable: Collecting owed revenues is one of the more common places to find cash. Make sure you monitor the aging of your accounts receivable and be in contact with your customers to ensure they make payments on a timely basis. You can incentivize them by offering discount terms on existing or future purchases for paying sooner.
2. Inventory: Inventory in raw material or finished goods is nothing more than cash setting on the shelf. The fewer the inventory turns (gets sold), the more cash you have spent but have not converted into revenues.
3. Scrap/Rework: If you’re a manufacturer/assembly company and have a higher than normal level of scrap or rework of material/product, you are taking inventory that should be converted to revenue, and turning it into an expense and impacting cash.
4. Prepaid expenses: If you have an expense that you have prepaid in order to benefit from discounts, you have traded current cash for future cash. The benefits may be worth the trade but if you’re short of cash, it may not be worth prepaying.
5. Accounts Payable Discounts: Suppliers and vendors want their cash position to be healthy and often are willing to provide discounts if their invoices are paid in a more timely manner. Not taking advantage of these discounts is leaving cash on the table that could be in your checking account.
These five areas are just the more obvious areas where tangible cash can hide. One of the largest and most subtle cash hiding places are found in low productivity. In most companies, the labor force is one of the largest uses of cash. The more productive the company, the sooner and more cost effectively the product can be converted into revenues (cash).
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