As a small business owner, I have always gotten excited to see a month with a profitable income statement. That meant that customers were buying, and I was being smart with how I spent money. At least on paper. There were those times where I could see that I made money, but it just didn’t make it into the bank account. I still felt like I was struggling to pay bills, even though the financial statements told me I shouldn’t have a problem. Where was the Cash going?

This is where the difference between profit and cash really set in. I had to realize that the income statement was limited to recording my business process but didn’t account for actual dollars hitting the bank account. So, I went on a treasure hunt for dollars within my own company. Here is what I found.

There were five different places where cash was hidden from the income statement. These five areas were killing my Cash Flow and making it harder to stay in business. Once I made the connection between cash flow and profit, I was able to change the whole trajectory of my business and its future. If you feel this way, look here.

1. Accounts receivable – Make sure you are being paid as quickly as possible.  I had a service-based business, where my largest expense was payroll. I had to educate my customers to treat my invoices more like a payroll expense and pay more frequently.
2. Accounts payable – This may sound a little odd, but don’t pay much earlier than the due date, unless you are getting a discount.  This is like a free loan and keeps cash in your company.
3. Inventory management – Learn to set your base level inventory amounts.  This is where you have just enough of an item between orders. Look at history and match your orders to your customers.  If they normally buy 10 of a particular item in a week, then you should have 10-12 on hand. Your quantity on hand should match your base level (or par) at the beginning of an order cycle.
4. Expense control – There is a hard and fast rule here.  The change in operating expense should mirror the change in gross profit.  If gross profit is reduced by $10k, then your should also reduce your operating expense by $10k.  Simply put, when you have less money, you should spend less money.
5. Mis-financing – Almost none of us check for this on a regular basis, but we should.  This is where you have purchased a long-term asset, with a short-term product. Like buying a house with a credit card.  You wouldn’t do this, unless you wanted the miles! No, you wouldn’t do this because the cost of borrowing is too high, and it would increase your interest expense.  The length of the loan should match the life of the asset is the rule.

Create a cash budget to match your income statement.  It is important for you to visualize how cash moves through your company in order to not just make money, but also have it in your bank account.

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