Cash + Receivables – Payables = Spread
If for some reason my accountant can’t give me financials in time, I at least get the Spread numbers. They are super easy to get.
Your Spread will vary perhaps quite wildly if you measure it each week. This is because many suppliers send you their bills each month. So at the first week of the month, your payables will be highest. So it’s best to measure it the same time each month to compare it to last month.
In some businesses, it may make sense to measure the Spread AND another number such as “Spread including Inventory” if your business has lots of it and if it varies. So that would be the Spread + Current Inventory.
I don’t do this for my service businesses. They have inventory but it is not a huge component of the business and while it may vary from month to month some, over long periods like quarters, it stays relatively constant. I will do this for my supply businesses though because we are all about inventory.
In other businesses you may find it helpful to measure “Spread + credit line balance” if you have a credit line that goes up and down. That would make a lot of sense.
For me, I’m old-fashioned. If I owe money, I don’t take profits. I don’t like debt. Sure, it’s a tool that some businesses need, but the more you use it the more you are at risk and beholden to others. I can delay gratification for my peace of mind and freedom. And, I have hundreds of other people to think about.
Knowing my Spread lets my little pea brain understand and hopefully sleep well at night, knowing what the financial performance and output of my businesses are.
If you don’t measure it and chart it out monthly, start now.
The Spread. The end.
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I have been following “Think Daily” for many years. The Spread is one of the best posts! As business owners sometimes we over complicate what we measure on a monthly basis. The Spread is fundamental blocking and tackling. Thank You for the reminder!
Larry. the 3 part series on spread is well done and helpful to anyone running a business. Thank you for sharing it.
George
Larry, thank you for sharing this very valuable tip! I check my spread but not nearly often enough. I’ve never really gone back and compared it over a long time either so that will be interesting. I have been using a P&L statement but that includes everything in the business and doesn’t really give the simple Spread that you refer to.
Very helpful and easy to do Thank you
Very Helpful!
Thanks for he lesson Larry, will put this into practice.
Larry, I am grateful for your unselfish commitment to our success. The Spread 1, 2, & 3 were great.
I watch the spread at home and at work like a hawk
Yes it is very helpful. A very efficient and succinct way to know what’s going on in you business at all times. Thank you Larry!
Thank you! This is very timely for me as I was considering taking out a chunk of money out of my business and was wondering how much reserve I should leave in. I will start tracking this metric immediately!
Cash on the balance sheet or actual bank balances?