Protect your business from wasting cash by consistently calculating your ending cash position.  A business that consistently has an ending cash balance greater than its beginning cash balance is a business making money.

Wasted cash is the number one cause of weak cash flow because money is being spent on things that don’t contribute to sales at a profit.   Allow the ending cash position to be less than the beginning cash position too many times throughout the year is how you run your business out of cash.

Overview

The ending cash position for a business is best represented by the Cash Flow Equation that determines if the business ended a cash flow period better or worse off.  Calculating the ending cash position is as follows:

Beginning Cash + Cash Inflow – Cash Outflow = Ending Cash

While the flow of money out of most businesses can be seen in a predictable pattern, rarely can the same be said for money coming into a business.  As a result, it’s far too common for business owners to have some combination of the following cash flow challenges:

1. The newness of the business or recent late payments makes it difficult to receive and pay on credit.
2. Growth opportunities can reduce the amount of available cash.
3. Unused or underutilized purchased inventory ties up cash.
4. Customers who pay on credit delay the amount of incoming cash.
5. Selling to other businesses at less than full price and on credit delays both the amount of incoming cash and the quality of that cash inflow.
6. Uneven sales due to seasonality or other factors create peaks and valleys in the amount of cash available.
7. Nonpayment by customers robs you of cash that then becomes bad debt.
8. Unexpected expenses that force you to spend unplanned cash.

Projecting your ending cash position for a week, month, and year is at the core of cash management.  For example, a negative $2,000 ending cash balance for a week may seem insignificant, it only represents a small amount of more cash flowing out of a business than inflows.  The significance of this is proportionate to the size of cash reserves.  Put another way, you can only maintain this type of cash deficiency for five weeks if your cash reserve is $10,000.  Have no cash reserve, and that $2,000 in needed cash to pay just became your number one problem to solve when you don’t have the cash.

The ending cash position equation is one of business’s most important yet underutilized equations.  Knowing how your cash position changes through the year is how you make more money with less stress.

Allow the ending cash position to be less than the beginning cash position too many times throughout the year is how you run your business out of cash.  Protect this from happening to you by adopting a cash management system to help you stop wasting cash.  Wasted cash is the number one cause of a weak cash flow because money is being spent on things that don’t contribute to sales at a profit.