15760 Ventura Blvd, Suite 610 Encino, CA 91436
15760 Ventura Blvd, Suite 610 Encino, CA 91436
Personal, Affordable Payroll Services, Bookkeeping, and Tax Processing for Small Business throughout Los Angeles County.

Increase Your Profits Tip 10 – Where Did All My Cash Go?

Screen Shot 2015-09-04 at 12.02.10 PMYour CPA says you have to pay a bunch of taxes because of your great profits. Multiple emotions flood your brain. Great! We are finally making the kind of money we knew this company could generate. Ouch! The taxes are huge. Not only do I have to pay all those taxes for last year’s sales, but I also have to pay the first quarterly installment based on those profits. It is a huge number. Sigh! Lots of taxes to pay, but with all those profits, I should have plenty of money to pay them on time. Agghhh!! There is no money. In fact, there isn’t even enough money to run the company effectively. How will I pay the taxes?

It is not unusual at all for profitable companies, especially growing companies, to run out of cash. The reason is simple, though often not understood by owners: profits can be consumed by inventory, receivables, and capital expenditures. The income statement will show a profit, but the profit is tied up in increasing assets.

As we have been pointing out in Profit Tips 1 -9, business owners can avoid surprises, and increase profits, cash, or at least anticipate cash issues by having a working understanding of their financial statements. There are several ways to watch cash.

Cash Flow Analysis

A proper cash flow analysis is a sophisticated financial report that anticipates cash inflows and outflows based on historical trends, including average days to be paid on receivables, and average days to pay payables. This analysis also takes into consideration inventory flows based on the timing of new inventory coming in and historical information regarding sales. What this report cannot take into consideration are anomalies such as:

  • Dramatic swings in sales by product or category. If you start to accumulate a lot of slow moving inventory and are running out of good product, this will result in cash shortages that won’t be picked up on a cash flow analysis.
  • Creeping bad debt. If you receivables are not getting paid on time, and/or you have some debt that is uncollectable, this will not show.
  • Major unbudgeted capital expenditures on new equipment or major upgrades or repairs.

A cash flow analysis will show you where to anticipate shortfalls in your cash, and some companies use this analysis to invest amounts not currently needed in short term securities.

Balance Sheet Comps

Running monthly, quarterly, or annual balance sheets side by side can quickly show you trends in categories such as outstanding payables, receivables, or cash, inventory, etc. When running the comps, you might also want to show each category as a percentage of the parent class, either assets or liabilities. This way if inventory is increasing as a percent of total assets, you will see that number jumping out at you.

You can also ask for a change in position report. This will provide you with changes by dollars or percentages for each category on the balance sheet.

Exception Reports

A great favorite for owners who have no time or desire to analyze the reports is the exception report. Here you set budgets for everything. Take inventory as an example. You could set the inventory budget to be no greater than $100,000 or if the company is growing, you could set inventory to be no more than 15% of assets. Another possibility is that the inventory would be a percentage of sales. You could even set it to show no more than and no less than. Now, when the trigger is hit, you are notified, and you can speak to your buyer to make sure that they either increase or decrease purchases accordingly.

If you would like us to set up a system for you that would provide these types of snapshot reports, please call ATPP for a quotation. Call 818-436-2775.