Even in a Cash Business, Cash Can Be Tight


It’s amazing how cash can slip through the fingers of even the most frugal small business owner. It just happens without you realizing it. It’s not like anyone walks out the front door of their house and says, “I’m going to spend all the cash in my business, so I have to struggle to make payroll.” For some business owners, this is never the case, but for others it is an ongoing struggle.

The process starts by making sure you have enough money to make rent and cover most of your fixed expenses. Then your vendors want paid for the last order before they will deliver the next. You have unexpected repairs happen the same month as you initiated an advertising campaign. Then a snowstorm hits the area and traffic through your store comes to a grinding halt. It happens just that fast in some businesses.

The most common response to that story is “that company is undercapitalized.” Undercapitalization is one the prime contributing factors to bankruptcy and eventual closure. Even if you have profit listed in your income statement, you still might run out of money. The successful business owner knows this and builds a cash budget to help buffer against the times of year this may happen in his business.

A cash budget runs concurrent with your annual plan. Most small business owners will prepare some type of forecast of sales and expenses for the year, but fail to account for the time it takes for cash to be deposited in their bank account. This is especially important for companies that allow their customers to pay their invoices with credit terms. However, even cash businesses may have a collection lag to account for if they are running lean on cash. This happens when credit card receivables are not deposited until three days after the sale. The lag is short, but often noticeable by the small business owner trying to use the funds.

If you find yourself in a position where you do not have adequate cash on hand, or a line of credit to rely on; it is an absolute must that you have a cash budget to make it through the month. A simple way to start is by printing out a month’s calendar page and identify the days when your bills are due and how much is needed to satisfy them. Include all of your fixed operating expenses, inventory purchases, payroll amounts, and a small “just in case” amount. This will give you the weekly and monthly amount needed to break even.

The next part is a little more complicated. You can’t just enter in the average daily sales and expect to have a clear picture. If you accept payment on terms, calculate your average collection period in days using this formula: average accounts receivable / (average sale/365 days). If, for example, this amount is determined to be 60 days, then the sales amount you are posting in the current month are derived from orders you placed 2 months prior. January orders are posted in March’s cash budget. The same concept applies to credit card receipts in a cash business. Most credit card sales are deposited three days after the actual transaction. Therefore, Monday’s sales are deposited in your account on Thursday.

Once you have both cash inflows and outflows identified on your calendar, you should be able to clearly see any shortfalls. This is what we are looking for. If you can see the time periods during the year that you may need money to meet your expenses, you can prepare for it. That is the key to having a healthy and sustainable small business. To manage cash, try using a cash budget. Your employees, vendors and family will thank you for it.