Plenty of profitable companies have gone under. It sounds impossible until you live through it: the income statement shows a healthy profit, yet the bank balance keeps shrinking, a big customer pays in sixty days instead of thirty, and suddenly you are juggling which vendor gets paid this week. Profit is an opinion. Cash is a fact.
You do not need to be an accountant to stay ahead of it. You need five numbers, read on the same day every month, and the habit of asking what moved them. Here they are.
1. Cash on hand, in weeks
Take your bank balance and divide it by what it costs to run the business for one week: payroll, rent, loan payments, and the bills that come every month. The answer is your runway in weeks. Write it down every month.
There is no perfect number, but most steady businesses sleep better with eight to twelve weeks of cushion. More important than the number is the direction. If the runway shrinks three months in a row, something is wrong, even if sales look fine.
2. How fast customers pay you
Accountants call it days sales outstanding. In plain terms: on average, how many days pass between sending an invoice and getting paid? Your accounting software can usually run an aging report that shows who owes you and how long it has been.
3. How fast you pay others
The flip side is days payable: how long you take to pay suppliers. Paying too slowly damages relationships and can cost you discounts. Paying too fast, earlier than terms require, quietly drains cash you may need. Line up your payables with your receivables so money comes in before it has to go out.
4. Gross margin, by product or job
Gross margin is what is left from each sale after the direct cost of delivering it: materials, direct labor, and freight. Most owners know their overall margin. Fewer know it job by job or product by product, and that is where the trouble hides. A busy line that barely breaks even can eat the profit from three good ones.
Pull the numbers on your top ten products, services, or customers. You will probably find one or two you are subsidizing. That is not always wrong, but it should be a decision, not a surprise.
5. Thirteen-week cash forecast
This one takes an afternoon to set up and twenty minutes a week to keep current, and it is the best tool we know for avoiding a cash crunch. On a simple spreadsheet, list the next thirteen weeks across the top. Down the side, list the cash you expect to come in (by customer, if you can) and the cash going out (payroll, rent, loans, big purchases, taxes). At the bottom, the running balance.
When a low week shows up two months out, you have time to act: push a collection, delay a purchase, talk to your banker about a line of credit while you still look healthy. Bankers lend to owners who see trouble coming, not to owners already in it.
Read the same five numbers on the same day every month. In a year, you will know your business better than anyone who ever audited it.
Making it a habit
- Pick a day. The tenth of the month works for most businesses, after the books close.
- Use one page. Five numbers, this month and the last three. Nothing fancy.
- Ask “why?” about anything that moved more than ten percent.
- Share it. Your bookkeeper, your partner, and your banker should see the same page you do.
When to call in help
If your books are more than a month behind, if you cannot say which customers make you money, or if a growth plan depends on borrowing you are not sure you can repay, it is time for an outside review. Our Financial Review reads your books the way a banker will, then hands you a plain-English report and a short list of fixes. And if you are weighing an expansion, it pairs naturally with Growth & Expansion planning, so you grow on cash you actually have.
