Always Know Your Cash – Earning Profits but Out of Cash
One of the most baffling accounting occurrences for the newly initiated is when their company shows a clear profit, but their cash is running frighteningly low. New business owners often confuse making money (i.e., earning profits) with having money. However, profits don’t always mean sufficient cash, any more than cash in the bank means clearing a healthy profit.
That sounds questionable, but it’s true. Every time you make a sale on account, it adds to your revenues and your profitability, but it has absolutely no impact on your cash until the customer pays up. If you have a lot of slow- paying customers, that could put you into a big cash crunch. Even if they aren’t paying you, you still have to pay your bills.
It’s very common for new business owners to focus on sales, doing what- ever they can to seal a deal. A lot of times that means extending credit to the customer, sometimes without making sure that the customer has a good payment record. Even customers with stellar credit history sometimes hit cash crunches of their own and make late payments to keep their own cash flowing more smoothly. Payments that are late or never made can wreak havoc on your cash flow Even though your sales numbers look great, and you’re hitting all the sales goals you’ve set for the company, you could still run out of cash.