Cash management & Accounting

Financial statements:

  1. Income Statement: Are you profitable?
  2. Balance Sheet: Are you healthy?
  3. Cash Flow Statement: Where is cash going?

Types of financial statements:
Cash: as cash comes and goes, it’s recorded on the income statement. it’s volatile.
Accrual: revenue and expense is matched, independent of the cash flow. it’s steady and allows you to see your actual cost, but for small businesses it can be harder to understand and manage cash.

vertical and horizontal analysis:

  • Vertically: compare to expected values
  • Horizontally: compare to historic values

Related Concepts:

  • Profit Vs Cash Flow: Profit is an accounting measure. It doesn’t tell you how much MONEY actually came into the business.
  • Cash Conversion Cycle (CCC) is used for inventory investments
  • Service-to-Cash Cycle (SCC) is used for service investments
    Above 0 = longer to sell & collect cash than to pay vendors.
    Below 0 = faster to sell & collect cash than to pay vendors.
    The lower, the better. Higher numbers indicate current or future cash flow issues.
    Strong CCC means there is cash to fuel growth. Without it, growth must be financed. It's risky - with larger receivables, comes larger payables.
  • Make cash collection a priority & finance teams can analyze new opportunities instead of restructuring debt. Collecting cash quickly is a function of operational efficiency.
  • Relationship Management: Getting great payment terms from customers & vendors requires quality relationship management. Consistency, reliability, & being liked will dramatically improve the cash position. Treat them well and be clear with expectations.