Skip to content-main content

Understanding Your Cash Position

Understanding your business’s cash flow is essential to making sound financial decisions. Cash flow can be difficult to forecast in businesses with many segments, differing products and services, and various geographies. Also, a business can be profitable but still run into cash flow difficulties with the timing of cash receipts versus payroll, vendor, and loan payments.

To understand your cash position, begin with the following steps:

1) Gain a thorough understanding of all cash inflows and outflows of the business. This can be done through interviews with business segment leaders and staff and tracing the cash receipts and disbursements from beginning to end (the bank).

2) To start, pick one month. Develop a list and total all cash receipts and disbursements. The total receipts less total disbursements should equal the cash balance at the end of the month (adjusted for any outstanding checks or wire transfers).

3) Make sure to tie out your work to the business bank statements to insure integrity.

4) Keep track of your cash position in this way each month. After several months take note of any trends. With your other financials (balance sheet and income statement) handy, you might be able to calculate how long it takes to collect cash after a sale is made (days sales outstanding*) or how many days after a bill is received it is paid (days payable outstanding**). As an added bonus, you will actually see where you are spending your money.

5) After several months you will begin to be able to see how to forecast cash into the future. Beginning with your ending cash balance from the previous month, add your cash inflows based on how much of your sales you collect in the same month, and subtract out the liabilities (bills and payments) coming due. This analysis can also be tied to your budget or forecast.

6) Further understanding the dates that loan payments are due or other liabilities will enable you to understand when you might need to borrow from credit lines or equity sources.

7) With larger accounting software packages, cash flow statements can also be generated automatically within the system with defined parameters. Contact your software provider or accountant to further understand the capabilities of your system.

Gaining a understanding of your cash flow will allow you to understand when you have excess cash on hand to make investments or when you might need to borrow from an equity or debt source. Overtime this should enable you to make sound and less stressful business decisions.

*:  DSO = ((Accounts receivable/(Sales/ 365))
**:  DPO = ((Accounts payable/(Cost of Goods Sold/365))

About the Author

Carrie Geldreich is a Director on the Finance and Advisory team leveraging her broad skill set tackling some of our clients most strategic business issues like strategic planning, developing exit strategies, planning for and executing acquisitions, and financial planning and analysis. Her personal style is rooted in teamwork and she thrives on collaboration. Her passion lies in helping both businesses and their people succeed. Learn more about Carrie. Contact Carrie.