Cash Flow Traps

Sweet!! Your company just received a 50% down payment on a project, let’s take everyone to dinner and buy that equipment we’ve been looking at.  Whoa there big fella, let’s think about this first.  Yes, you have cash, but the million dollar question is: Can you spend it?  Just like a lawyer the accountants answer is “not yet”, let’s look toward the future.  Just because you have a positive balance in your checking account, does not mean you have money to spend.  As opposed to the Government, they don’t think about this at all.

 The next question is: How long will this project last and what costs do I have before the next payment is received from your customer? Assume the project lasts 4 months, the down payment you received up front needs to be used to pay the salaries of the people working on that project, as well as any and all expenses associated with that project. Your company can get upside down in cash before you know it.  If you don’t receive any more money until the end of the project, you will have to borrow money from the bank or find some other financing just to finish the project. 

 Let’s assume some facts: 1st the total revenue on the project is $150,000 and you receive a 50% down upon receipt of order and the final payment is due when the project is delivered.  2nd costs for parts is 60% of the total project and you pay your vendors 30 days after receipt of PO from customer, and 3rd your operating expenses are $10,000 per month. 

 

Month 1

Month 2

Month 3

Month 4

Beginning Cash

0

$65,000

($35,000)

($45,000)

Received Cash

$75,000

0

0

$75,000

Cash Spent on Parts

0

$90,000

0

0

Operating Expenses

$10,000

$10,000

$10,000

$10,000

Ending Cash

$65,000

($35,000)

($45,000)

$20,000

 

As you can see, just because you have cash up front does not mean you have cash to use.  As a responsible company you want to make sure you have money in the bank to pay the salaries of your employees and pay your vendors.  You don’t want to be like California and issue IOU’s.  I’m not sure, but I don’t think that would go over well with your employees or your vendors.  If your employees don’t mind, please let me know they would be a great cash flow asset here at Setpoint.

One Response

    Killjoy!

    Just kidding. Unfortunately the scenario of which you speak is very familiar to me. Cash Flow can often become a mysterious, amorphous blob of an issues if you don’t keep it at the forefront of your mind. Definitely a good caveat for everyone.

    Thanks again & I really like the design of your blog.

Leave a Reply

Your email address will not be published. Required fields are marked *