Suggestion: To most non-financial individuals, the terms profits and cash are used interchangeably, which is incorrect.  The phrase “cash is king” is very true.  Let’s help to find where cash is likely hiding.

1.       Accounts Receivable:  Collecting owed revenues is one of the more common places to find cash.  Make sure you monitor the aging of your accounts receivable and be in contact with your customers to ensure they make payments on a timely basis.  You can incentivize them by offering discount terms on existing or future purchases for paying sooner.

2.       Inventory:  Inventory in raw material or finished goods is nothing more than cash setting on the shelf.  The fewer the inventory turns (gets sold), the more cash you have spent but have not converted into revenues.

3.       Scrap/Rework: If you’re a manufacturer/assembly company and have a higher than normal level of scrap or rework of material/product, you are taking inventory that should be converted to revenue, and turning it into an expense and impacting cash.

4.       Prepaid expenses:  If you have an expense that you have prepaid in order to benefit from discounts, you have traded current cash for future cash.  The benefits may be worth the trade but if you’re short of cash, it may not be worth prepaying.

5.       Accounts Payable Discounts: Suppliers and vendors want their cash position to be healthy and often are willing to provide discounts if their invoices are paid in a more timely manner.  Not taking advantage of these discounts is leaving cash on the table that could be in your checking account.

These five areas are just the more obvious areas where tangible cash can hide.  One of the largest and most subtle cash hiding places are found in low productivity. In most companies, the labor force is one of the largest uses of cash.  The more productive the company, the sooner and more cost effectively the product can be converted into revenues (cash).

Let us know your thoughts about where you have found cash hiding in your organization.

Managing a business requires a broad set of skills and attention to all parts of the business. Many CEO’s are good at making or selling “things” (goods and service offerings) but some don’t spend enough time monitoring the overall health of their business. Keeping close tabs on the performance of the business is critical, particularly as our economy works its way through this recovery. The easiest things to monitor are sales and cash in the bank, but that is only part of the picture. Positioning the company for growth requires additional effort to understand and monitor not only sales but also those activities that impact profitability and cash flow.  A key to successfully growing the business is identifying a set of key metrics that provide the visibility to help chart the course for the company’s growth, let’s review “What to Measure:”

Margins - The first step is to understand your gross profit margins (sales minus cost of sales). Begin by segmenting sales into groups of products or services that are similar, such as product families. Segment the cost of products and services into those same groups or product families. This will enable the monitoring of margins by product family and make decisions about pricing and position you to monitor costs in each product line.

Expenses – Next, monitor those costs that create and market the products and services, such as research and development, marketing and sales expenses. To the extent possible, group the costs to design and market products so that those costs can be compared to the margins generated by the sales of those products to facilitate decisions about continued and new investment.

Receivables – Once the products and services are sold and the quicker the receivables are collected, the sooner the cash is available for supporting the business. Speeding collections starts with taking orders accurately, invoicing correctly and following up with customers to ensure that all steps have been done by the company to support the customer’s approval process. Measuring these key steps will help reduce issues and speed collection resulting in better cash flow and reduced write-offs and increased profits

Inventory – If the company creates or buy products for resale, measure how quickly the overall inventory turns (inventory used or sold), and if the company has a process that supports it, measure how quickly groups of inventory turn. Every dollar tied up in inventory is a dollar in cash unavailable for other operating needs.

Operations – Look for operational metrics such as employee counts, number of hours billed, square footage, etc. Besides looking at those operational metrics, try to combine financial metrics with operational metrics to provide a fuller picture of the business.

Measurement steps – Create a scorecard using a spreadsheet or by purchasing a scorecarding product. In either case, look for a balance between the level of effort to collect the data and the frequency of providing the information. Start at a higher level of information and keep it simple. Add more complexity as additional areas are identified that warrant more analysis. Look at the trends in the metrics over several years to get a big picture view about where things are improving and where attention is warranted. Also, check with the bank to get industry standards so that a baseline can be established for comparison purposes.

By frequently measuring the important trends in any business the management will be in a better position to control the growth of the business.