Most owners are always anxious to receive the monthly financial on how their company is doing. Almost inevitably they turn immediately to the income statement and go to the bottom line to see what the net income was. Then they spend a lot of time reviewing the sales levels and margins and look for variations in expense accounts. This is all well and good, but oftentimes their review stops there and they ignore the balance sheet and other financial information. Although net income is an important driver of the business, cash flow is probably an even more important driver and nothing affects cash flow more than the balance sheet.
The Balance Sheet can be a “Cash Sponge”
If the balance sheet isn’t managed, it can soak up cash flow. Increases in sales can result in accounts receivable and inventory increases, but those increases should be in proportion to the sales increase. Oftentimes, to meet the demand of increased sales, inventory and sales procedures take a back seat and vendors are paid sooner resulting in substantial drains in cash flow as the cash is locked up in the balance sheet accounts.Read More