Sep29
Do You Know Where Your Cash Is At? Here’s How to Find Out.
I am not an accountant. Neither am I the son of an accountant. Yet there I was taking over a company drowning in debt. The disaster I inherited totaled nearly $200,000 of past due payables and included six months of federal withholding taxes that had not been paid and ten months of state withholding taxes that also had not been paid.
Creditors were banging at our door and the IRS was on its way. How had this happened?
It wasn’t for the lack of an accountant, before I took over the company we had, not one but two, accountants working for us. It wasn’t for the lack of income, I had come from the sales side of the organization and revenue was at record highs.
It had happened because of a lack of attention to cash flow.
We eventually survived this disaster. In three years we posted a profit and as a company learned a critical lesson: cash is the lifeblood of any business. Attend to it with great care.
What is the cash position of your small business? Here’s how to find out:
Take the amount of cash you have on hand right now and add it to the amount of money people owe you (your accounts receivable). Got that number?
Now take the amount of money you owe other people (your accounts payable) and add it to other debts you will need to pay within the next 12 months. Got that number?
Now divide the first number by the second number. Your final number should be greater than 1.00 or your cash position is in jeopardy. In most cases, you want your final number to be closer to 2.00 or higher.
This is a simple formula called the Quick Ratio and is essential for managing your cash. Like breathing, it can’t be delegated. And, like breathing, it’s critical your survival.
“I have no idea where my money is at,” a small business owner sheepishly admitted to me in one of our coaching sessions. “I just keep working hard in my business hoping everything will be okay.”
Is that what you’re doing?
Yes, it’s good to work hard in your business, but nothing is gained by ignoring your cash. Calculate your Quick Ratio today. If you’re way below the number 1.00, you may not make through the next 12 months. Get help immediately.
