Sales are up—but where did the cash go?

At one point or another, almost every CEO of a growing company has asked, “My sales are growing, but where is my cash?” CEOs tend to focus on revenue growth, which, as they quickly learn in times of rapid growth, can be very different than an increase in cash flow.

So, where is the cash hiding? Here are seven hiding places for cash:

1. Your customers: Accounts receivable balances grow in times of company expansion. Fast growing companies often lack adequate credit policies—or not adhere to these policies and just focus on making the sale. Combining this with a more reactive approach to collection efforts (no one in accounting really likes collections) turns you into the bank earning 0% interest for your customer. When sales volumes are increasing, having average days in accounts receivable increase from 15 to 45 days can result in a huge drain on cash.  A credit policy and proactive collection policy can help temper this.
2. Your vendors: When growing, it’s common to spend less time scrutinizing expenses, evaluating competitive pricing for products, and negotiating longer payment terms.  It’s also common for accounting NOT to take advantage of terms offered by vendors. Accounts payable employees sometimes just want to pay bills when they come in rather than waiting the 30 days you have in the terms set by the vendor.  A simple cash management and cash payment process can help remedy this.
3. Inventory or payroll: For a products company, a projected increase in sales means a need for higher inventory levels. Funds are going out the door to purchase inventory potentially well in advance of their sale, and eventual collection from customer—which leads to longer cash cycles.For a service company, projected increase in sales (or increased backlog) means there’s a need for more personnel and often companies are unable to manage timing of this adequately. This means there’s poor utilization of employees and lost profit margins due to higher payroll costs than needed.  Having access to adequate working capital in a growing company and monitoring the use of credit lines to ensure they’re used as intended are critical.
4. Inefficiencies: Sales growth can actually hide many inefficiencies that go undetected without proper financial reporting and analysis tools. As an example, a specific location is doing poorly, but you aren’t evaluating profit by location or a few of your sales team members are abusing the company expense policy. Without someone monitoring, no one holds them accountable. These commonly overlooked inefficiencies can be easily discovered by having a monthly financial reporting package, budgets, and a key performance dashboard.
5. Fraud/Theft: From inventory or equipment that “disappears,” unapproved credit card expenses, unapproved employee bonuses made in payroll, to employees taking actual dollars from the company, fraud and theft occur more often than you would imagine. Fraudsters typically start with small amounts, and when no one notices, the theft increases significantly over time. Having proper internal controls and another set of eyes on your processes can help deter a fraudster.
6. Capital Investment: To ensure continued growth, companies often need to invest in equipment, software, infrastructure, etc. These cash flow requirements are NOT recorded on the income statement, and are typically on the Statement of Cash Flows since they’re capitalized and depreciated over time. The problem is, for example, when the CEO looks at the net income for the month they may see $100,000, but if $80,000 was spent on equipment, they may not realize this cash went out the door. Having a process of reviewing the Statement of Cash Flows monthly will give you the whole picture and tell you where every dollar is being spent in the company.
7. Owner Distributions: Although this one seems obvious, it’s common for owners to actually forget that they received cash distributions from the company. These amounts, whether paid in real cash or perks that are distributions instead of actual company expenses, can add up and an owner can forget that these funds were taken out of the business and distributed to them. Complicating this is that with an S-corporation, owners pay taxes on the corporate profits personally. Without proper tax planning and a system for setting aside these funds, these obligations can be an unnerving surprise.  Having a budget that projects these distributions, tax obligations, and takes into account the owner’s personal spending goals can help manage expectations and align corporate distributions to meet the personal goals of the owner without placing undue hardship on the company.

Sales growth should be an exciting time, and you shouldn’t be worrying about where your cash is hiding. At CFO Strategic Partners, we know how to keep your company’s cash in plain sight. Give us a call today at (407) 426-8288 or email us at admin@cfosp.com so we can help you make the most of your company’s growth.