Is Your Small Business Actually A Bank In Disguise?
You might be asking "What? A bank? I sell ________!"
So, let me explain this common trap many small businesses fall into (without even knowing it!).
If you read my last post HERE, you learned about how to increase your cash in your business by using some common Quickbooks reports. You found that you can pretty easily calculate 1) how long on average it takes you to collect your accounts receivable, 2) how many days on average it takes you to pay your vendors, and 3) how long, on average, your inventory sits on your shelves before being sold.
So, as an example, let's say you come up with the following for your business:
- Days to collect receivables - 45 days
- Days to pay your vendors - 30 days
- Days your inventory sits on your shelf - 90 days
On the face of it, this doesn't look so bad, does it?
But let's take a closer look.
In this example, you order your inventory on Day 1, and get it a few days later, with the bill attached. 30 days later, you pay for that inventory, but it sits on your shelf for another 60 days before you sell it (90 days total - 30 to pay for it, then 60 before it sells after you pay for it).
In the meantime, it takes your customer 45 days to pay for what they take out of your inventory.
OK, so what does this mean?
Well, first, you are financing your customers for an extra 15 days (ie you pay your vendors for goods in 30 days, but your customers pay you for those goods in 45 days), and you are probably not getting any type of interest on this "free" financing.
Second, your vendors are essentially using you as a bank, by selling you goods that you pay for that sit on your shelf - for an additional 60 days after you buy them! Are you earning interest on this money you "loaned" to your vendors?
These 2 disparities in timing are what's called "cash gaps" and can literally KILL you business and your dreams of financial success.
Your goal as the OWNER, MANAGER and LEADER of your small business is to close these cash gaps.
And when you do, I can guarantee you will see huge swings in positive cash flow.
So, how do you close these cash gaps? What is the most effective way to close them?
I'll go over some simple ways to close these gaps in your own business in my next few posts and let you in on some secrets I've learned over the years of what actually works and what doesn't...
And you can find everything you need to implement these strategies in your own Quickbooks file.
The Quickbooks University team