Where did the cash in my business go?

In my accounting days, I lost count of the number of times I heard from clients, “I can see profit on the profit and loss account, but where is the cash?”

In fact, last year I ran a workshop in New Zealand for almost 200 small business owners called “Show Me The Money” for a proactive accounting firm, TvA, in Blenheim. I asked the business owners in the audience if they ever had that thought, and almost 100 percent of hands went up.

And in 2005, I surveyed 1500 business owners to ascertain what help businesses need from their accountants. As part of that survey, it transpired that 58 percent of the respondents needed more help with cash flow management. I suspect that number might be greater now.

So, what can we do to keep track of cash on a regular basis? At a bare minimum, you should work with your accountant to put together a cash flow forecast that is broken down at least monthly and better yet, weekly. Then, at the end of each week (or month) pull out the forecast and compare the actual cash and bank balances to your forecast. If you are below your forecast balance, find out why.

Here are some things to check for:

  • Is profit below target? If so, what can you do to increase sales or reduce costs (without impacting on customer service or sales and marketing capability)?
  • Are customers taking longer to pay you? Do you need to implement a more rigorous collections system?
  • Is inventory blowing out? If so, do you have an inventory management system, or would you benefit from implementing one?
  • Are you drawing out excessive amounts of cash, leaving the business short of working capital?

I think the key with cash flow management is to design a system that makes sense to you, the business owner. Review it regularly to help you better manage your business and, ultimately, your cash flow.

To do that, the information needs to be presented in a format that business owners can easily understand. I am a big believer in presenting information visually.

I’ve shared this chart previously to help a business owner understand the difference between profit and cash flow.

Cloud accounting helps

The relentless march in cloud technology provides another avenue to help business owners keep track of their cash. Whether you are using MYOB AccountRight Live, MYOB Essentials or any other cloud accounting package with bank feeds, you can log in each morning and instantly see your cash position displayed in graphical format.

With some basic training, most business owners can then drill down and take a look at what is causing major movements. With the ability to track actual versus budgeted performance in real time in your cloud accounting solution, you are much better placed to take action in a timely manner when things go wrong.

Cloud accounting and bank feeds may not be the complete answer in certain cases. In March 2013, The Australian Capability Management Index released a comprehensive report comparing the capabilities possessed in-house in small businesses versus larger organisations.

Small businesses came out ahead in many areas. For example, they are nimbler, able to make quicker decisions and often more innovative, but the biggest challenge for small business owners as noted in the report was the ability to understand and interpret the critical numbers in their organisation.

Note that it’s not the ability to have the numbers. Cloud accounting and bank feeds makes that a simple proposition. Instead, it’s the ability to understand and interpret the numbers. In other words, here are the numbers, but what the heck do they mean for me and my business?

This is where a close relationship with a proactive accountant can pay major dividends. For example, accountants using a tool like PANalytics can check in on all of their clients on cloud systems on a daily basis. It also integrates with MYOB cloud accounting software, AccountRight.

The coming together of technology and business intelligence is a major key to helping small business owners really understand and interpret what is going on. And when you truly ‘get’ that, your cash flow woes start to become a thing of the past.