Cash + Receivables – Payables = Spread.
Measure it regularly each month. Did it go up? Did it go down? Why?
You have to be able to explain it. If you can’t, you don’t have a good handle on your business.
Make a chart (your bookkeeper/accountant would love to do this for you). Update this chart each month. I use a green line for cash, a yellow line for receivables, a red line for payables, and a blue line for the spread. I also put a brown line for sales for the month.
I have a lot of companies. When I get my financial statements for the month, the first thing I look at is the Spread chart. It’s like a summary I can understand RELATIVE to the past in seconds. I’d do this even if I had only one company.
The first couple months you have this chart it is useful, but it becomes much more useful as you get many months and years into it. You can see where the numbers are compared to historical norms or this time last year.
Remember, when you take money out of your business as profits, it brings the Spread down. So does being unprofitable and losing money. Whether you take money out of your business or not, does not change the net profit on your P&L, or how much you need to pay tax on. It’s just being safe about your cash management. If you are out of cash, you can’t pay anyone and it’s game over, everyone goes home.
More on the “Spread” tomorrow – Part 3!