Where’s the Cash? – Managing Your Company’s Cash Flow

Managing Cash Flow

Many business owners have lamented, “I made money, but why don’t I have any money?” Let’s examine why this is, and how to fix it.

Making money indicates that a company has net income. This means the company sold its goods or services for more than it cost to:

  1. Make and deliver its products or services;
  2. Manage the overhead of running the business;
  3. Pay interest on loans, and;
  4. Pay taxes on income to the government.

3 Aspects of a well-managed company

If a company is well managed, the cash it generates from operations should exceed its net income. Usually, depreciation is one of the main reasons that operating cash exceeds net income.

Depreciation is one of the costs subtracted from revenue to get to net income. Depreciation represents a decrease in the value of a company’s fixed assets (property, plant, and equipment). Therefore, depreciation is a non-cash expense. Calculating “operating cash” begins by adding net income plus depreciation; which is why operating cash should be higher than net income. Based on this, if you made money, you should have money. If that is not the case, something has gone wrong.

There are three main areas where things may have gone wrong—accounts receivable, inventory and accounts payable. Let’s address these below.

Accounts Receivable

This represents the portion of invoices sent to customers for products or services sold that have not been paid. An untimely collection of these bills is one of the most common reasons companies that make money don’t have money. To measure your performance, compare your contract terms with customers to how long, on average, it takes to collect accounts receivable. This is often referred to as Days Sales Outstanding (DSO). Another important question is, are there accounts receivable on the books that will not be collected? These ‘bad debts’ must be subtracted from receivables and net income. If a banker or analyst questions your ‘quality of earnings,’ they are often questioning whether your receivables are in fact, collectible.

To increase cash flow:

  1. Write off all bad debts, so your picture of profit and collectible invoices is accurate
  2. Determine the aging of accounts receivable and why any invoices are not being paid on time
  3. Correct any problems that cause customers to not pay on time
  4. Write better payment terms into contracts
  5. Make sure project managers have adequate financial training to know how to manage cash flow


This is the next place where profit gets ‘tied-up’ in companies that sell physical products rather than services. Manufacturing companies buy raw materials and pay workers to make finished products. Payroll to these employees is usually due every two weeks, and vendors who provided materials are generally paid in 30 to 60 days. All the raw materials and finished goods that are unsold represent cash that is ‘tied-up.’ This is another reason a profitable company may not have cash.

To increase cash at companies with inventory, do the following:

  1. Get rid of and write off all old, obsolete and unsaleable inventory with corresponding loss to income to create accurate records. Salvage whatever cash can be recovered from discounted sales.
  2. Focus on minimizing inventory on hand and speeding up inventory turn-over
  3. Develop just-in-time strategies for managing inventory
  4. Improve relationships in your company’s end-to-end supply chain

Accounts Payable

This is the money owed to suppliers that have not been paid. Delayed payment to suppliers acts as a counter to the money your company has tied-up in accounts receivable and inventory. Operating cash flow is improved by slowing down payments to these suppliers. This may create some conflict since suppliers want to be paid promptly. Companies with good cash flow often deliberately pay suppliers promptly or even early to establish a good relationship, and often a competitive advantage with their suppliers.

Here are ways to improve operating cash:

  1. Avoid paying cash up front for materials or services provided
  2. Pay bills only when due (no early payments)
  3. Determine the average payment terms in your industry and decide your company’s payment strategy
  4. Write better payment terms with suppliers

Times in which the risk of cash flow is higher than normal for companies

  1. Start-up: When companies begin, there is no revenue and no accounts receivable to collect. This means that it will take a while before company operations start generating cash flow. During this time, it is critical that the company has enough ‘paid-in’ capital from shareholders and/or borrowed cash to pay its bills until there is sufficient cash from operations to pay the bills.
  2. Rapid growth: During stable times at a company, the collection of a prior month’s receivables will provide enough money to pay the upcoming month’s bills. Inventory will turn over quickly and consistently. Accounts receivable will increase significantly during periods of rapid growth. Most companies spend money much faster than they are collecting it to support this growth, which hurts cash flow. Planning for increased paid-in capital or lines of credit are essential to survive rapid growth.
  3. Problems in the local or global economy: Poorly managed companies often run short of cash during hard economic times. Your company’s receivable collections may slow down significantly or even be written-off if a customer declares bankruptcy. Building cash reserves during good times can keep you safe during these times of risk.

Proper management of accounts receivable, inventory and accounts payable will allow you to proudly announce that “I not only made money, but I have money!”

Interested in Learning More?

Contact us to find out more about our innovative financial programs and how we have other companies become successful.  

Learn more about Darrell Mullis, founder of MetaMark Learning.