“If I’m making that much, why don’t I have enough money?” is a question I hear frequently when business owners look at their income statement. The bottom number there is profit, and we all want to make a profit. But profits only matter if they translate to money coming in the door—that’s cash flow.
If you’re showing a profit but suffering a shortage of money coming in the door, one of the first places to look is at your Accounts Receivable. That’s money that clients owe that you haven’t received yet.
The very best kind of cash flows are those received in advance. Board & training fees for June that are due & paid June 1. This is the low-hanging fruit of cash flow—if you don’t already have this in place, look no farther for a big boost to your business.
The next-best kind of cash flows are those received at the same time they are earned. A trailer-in student hands you cash as she leaves the ring, or leaves a check in your box in the barn.
A distant last for cash flow desirability are payments that you have to wait to receive payment for. You send an owner the bill for the extra labor involved in putting medicine in her horse’s injured eye every 2 hours, and hope she sees fit to pay it promptly. These types of bills make up the item called Accounts Receivable on your balance sheet. That’s an important number to keep an eye on. But an even more important number, that’s not on the financials, is “Days in Receivables”. Days in Receivables is the amount of time that passes between when you bill and when you get paid. A big number here is the most common reason for being short of cash in spite of showing a profit.
There’s one more type of cash flow, a stealthy one that can also drain your wallet. Unbilled receivables are technically not a receivable at all. They are hours worked and services provided for which you have not yet billed the client (or been paid). It’s that same medicine-in-the-eye-every-2-hours care, if you treat the eye at the beginning of the month and don’t bill the client until the end of the month. If this one caught you by surprise, you’re not alone—it’s a cash flow hole for professionals in a wide variety of industries.
Next time you look at the financial performance of your business, consider how the various types of cash flow are coming in the door, and how that is affecting the health of your business overall.
If your business needs cash coming in the door faster and more predictably, schedule a free consultation to discuss how we can help you make it happen.