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Managing Cash Balances

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When I was a teenager, we had a dry erase board in our kitchen where we would write funny quotes. One time my brother simply wrote “Money goes away.” He had noticed that even when you seem to have a lot of money, it can disappear without much thought. You are left wondering what happened.

Do you find yourself wondering what happened when you look at your bank statement? When cash gets low, do you get nervous and start cutting expenses? Do you go through your contacts and emails to find lost billings? Do you start calling clients for past due payments? Does low cash ruin your weekend?

On the other hand, are you complacent when you have enough cash? Do you spend money on projects and labor now that you can afford it? With extra cash on hand, is now a good time to expand?

Cash Balance Challenges

Cash balances can be misleading. The balance alone should not be a determining factor for making financial decisions. This is a dangerous way to manage your business.

Why is this dangerous? Here are a few examples of common cash balance problems.

  • Overspending
  • Taxes Due
  • Billing in Advance
  • Collections

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Your profits are excellent for the year, and you are excited about the future of your business. The problem is that you seem to have much less cash than the Income Statement in Quickbooks indicates. But your profit is high, so you continue to spend and hire. You have to borrow more from your line of credit to survive.

The first place to look for a problem is on the Balance Sheet in Distributions. Many business owners will take distributions which aren’t typically reported on the Income Statement. You have to account for your draws from this business. Another area might be Property Equipment. Generally Accepted Accounting Principles (GAAP) reports this on your Balance Sheet. Other areas might be Inventory and Accounts Receivable.

Taxes Due

You had the best year ever for your business. You decide to use your extra cash to pay yourself more in distributions and buy more equipment. Your taxes show that you owe more than ever, but you didn’t set aside this cash. You are now in the highest tax bracket because you made so much money. You don’t have enough cash to pay your taxes, and you have to take on debt to pay your tax bill.

Paying more in taxes typically does mean you had a good year, but you have to prepare ahead of time for the tax expense. Consider setting aside up to 40% of your operating profit in a separate bank account.

Billing in Advance

You billed your new client in advance for future work. You purchased equipment and materials for the project and hired contract labor. The project went longer than expected, and you paid more for labor than estimated. You used some of this money to pay for operating expenses to keep your business going. Suddenly you need to purchase a major item for the project, but you don’t have to cash to do so. You have to borrow money to complete the project and provide the service you told the client you would deliver.

Billing in advance is a great idea, but it can make your cash balance look better than it really is. Set up a separate bank account for these types of expenses. Make sure the cash for materials, labor, and product for this project is set aside. Using a separate bank account is a manageable way to easily see where you stand. Understand your true cost so that you can markup the project accordingly. Account for any potential cost overruns.

25 Benefits of outsourcing to a Fractional CFO Download your free checklist!


You have been so busy that you have not been consistently billing your clients. You try to catch up and submit your invoices, but you find that some of the accounts are significantly overdue. You don’t have time to call and collect old invoices. Months go by since you submitted the bill. You don’t have any leverage, and you feel that you either have to write it off, send it to collections, or maybe go to small claims court. Who has time for that?

The easiest way to prevent these problems is consistent billing and collections. Bill your customers on regular basis so that they are more likely to approve the invoice. Remember that it is simpler to collect smaller amounts. Collections are easier when you follow up consistently. Who gets paid first? The customer that contacts their clients on a consistent basis.

Managing your Cash Balance

You did not go into business to lose money. You went into business to be profitable and grow. Managing your cash balance can be the key to growing your business.

Cash balances can be misleading. Make sure to separate your bank accounts between profit, tax, operating expenses, payroll, and revenue. If you can learn to manage your cash balances thoughtfully, you will see your business grow profitably.

In the book "Profit First", Mike Michalowicz suggests taking all revenue and putting a percentage into a profit account at another bank entirely. You need to have profits to help you grow and be sustainable, but you need to manage your cash balance at the same time.

If you need any help with managing your company’s cash balance, give us a call. Bender CFO is always happy to help.