How to Determine Your Cash Position
We've talked about cash flow in prior blogs, and we're going to continue talking about cash. It is imperative that we know our cash position at all times. Your cash position is simply how much cash do you have on hand at any given moment and an understanding of what that cash is allocated for.
While we always want to be mindful of not carrying unnecessary expenses, we have to remember, especially in a time of crisis like COVID-19, that we are paying for products and services that keep other businesses afloat – just like they are paying to keep us afloat. We need to be very responsible in our decision making. Not going in and willy nilly chopping all your expenses down that you actually need to run your business, or that you are going to need when you restart your business. Here are the steps for determining your cash position.
Make it Time-Bound
Start by defining the date you doing this analysis and the time frame you will cover. If you are doing this on the 15th of the month, you need to know that. Cash can come in and out at all times, so being very clear on what you are defining and analyzing will help you. This is kind of like when you were in math class and your teacher always made you define the variables. They matter. You also need to determine who long you are looking at cash with this analysis. Is it a snapshot of a day, week, month or year. Many of us will do this repeatedly throughout a year.
Determine Cash On Hand
Begin by looking at your online bank accounts and write down all the cash you have in the accounts. This is checking and savings. Do not include any cash that you are using to pay for Cost of Goods for your clients’ items. This money is already allocated to covering products and services for them and we cannot spend it twice. It is important to use your bank accounts for this and not an Income Statement or a Balance Sheet. We want real-time cash that is in the bank and can be spent.
Next, determine how much cash is coming in for the time frame you are analyzing. If you are looking at your cash position within a week, how much is FOR SURE coming in during this week? Timing is everything when doing this exercise. It is important that we are so very clear on how much and when we can expect it. Once again, only count the income that will be coming in and not attached to the actual Cost of Goods. We can include any markup on those items, but not the actual income that will be paid out to the vendor for COGS.
Add these two numbers up. Cash on hand (from your bank account) and cash expected over the time period. This is your Total Cash Available for the time period.
Determine Expense Burden
Now let’s look at expenses. Go through your credit card statements and your bank statements to identify everything that you owe for the time period you are analyzing. Again, not the cost of goods, we're not looking at that we're looking at operating expenses for your company. At this time, don’t include your salary or distribution and do not include payroll. We will consider those separately. Next, identify your payroll for the time period and then your pay (salary and distributions). This gives us clarity and allows us to look at each category separately and thoroughly for decision making. Go back through and look at any expenses that you can remove, that you can delay, or that you can reduce. I'm not telling you to go cut everything down to the bone where you can’t operate, but I am asking you to start looking at what can you do to reduce anything if possible. As we started this article mentioning, be intentional in this process because we are all symbiotic in business.
Add up all of your expenses from your research (operating, payroll, salary) and subtract any expense reductions you can take based on your thoughtful consideration. This will define your monthly spending (monthly nut is another term used for this).
Analyze Your Cash
Let’s analyze it. This analysis will give us insight into how long our cash will last. Compare your cash available to your monthly spending. What is this telling you? Continue to work your expenses down and to find ways to bring in cash to change the outcome.
It is so very important to have an idea of how long your cash is going to last and to use that knowledge to start making decisions on what to do to make it last longer or to know how long you're going to be good for. My suggestion is to do it for 30 days, if you need to do it per week, you can do it per week. And then I would run it out for 60 days or 90 days. You can then start to see what cash flow looks like. I beg you if you've not done it, go in and look at Understanding Your Financials. It's a game-changer because it's going to teach you how to read your financials. It is never too late to do it.
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