Know What Causes Your Cash Balance

Do you really know what causes your cash balance? I suspect many people don’t really stop to consider this.

It’s Not the Cash

In the blog Cash Management-It’s Not About the Cash Account I wrote about this some, but now I want to reemphasize what I think is often overlooked. Ask someone if they are on top of their company’s cash position and you may get a response like, “Sure I am. I check our balance every day. I even make sure that the bank activity agrees with what we have in our ledger.” Well, that’s all fine, but the cash account is not what causes the cash balance. It’s how you manage your assets besides cash, as well as your liabilities and expenses.

The First Big Ticket Asset Item

Accounts receivable is one of the two biggest influencers of how much cash you have. If you let it get too far past due you have cash tied up in it that you cannot use. It starts before a receivable is even created. For example, what are your credit policies? What payment expectations do you communicate to customers? These are things that happen or should happen before you even make a sale. Accounts receivable is one of these things I’m referring to when I say to know what causes your cash balance. If you don’t then you will be less likely to understand just how important credit management and collections are to your company’s survival. You can read more on accounts receivable and its impact on cash in 3 Low Cost Sources of Cash – Part 2.

The Second Big Ticket Asset Item

If you’ve been working any time at all you have likely heard the frustration created when a company is out of stock of a key item. It doesn’t have to be this way. By properly managing inventory levels you can greatly minimize the likelihood of a stock out, while at the same time minimizing the dollars you have tied up in inventory. If you have a 6 month supply of inventory and the vast majority of that consist of items that you really don’t sell that much, you likely have an idle asset in that it is not actively producing positive cash flow for your company. Again, read some more about this in 3 Low Cost Sources of Cash – Part 1 to understand a little better just how critical inventory management is to producing an adequate cash balance.

Other Things to Consider

All assets can have an impact on your cash balance to varying degrees. Additionally, it is imperative that you diligently manage liabilities, control your expenses, have adequate gross profit margins, and adhere to your budget. For some more on how to use a budget appropriately see Why You Never Hit Budget. I think you may realize that your budget has to be utilized to control spending.

So give it some thought. Are you sure you know what causes your cash balance and are doing the things necessary to assure you have adequate cash?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.


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