Balance Sheets Offer Clues to Cash Flow | SunTrust Resource Center

Control Cash Flow

Balance Sheets Offer Clues to Cash Flow

Balance Sheets Offer Clues to Cash Flow
 

Every business needs working capital to operate. Most employees, landlords and suppliers are unwilling to provide their services for free until you secure and get paid for a big sale or project. This means your business will have a significant amount of cash tied up at any specific time.

Knowing where your cash goes each month can help you better manage and grow your business.

Labor, phones, materials and other typical business expenses are relatively easy for owners to track, because they can be found on a standard profit and loss statement. Other cash costs like inventory carrying costs, interest expense, changes in accounts payables and capital spending can be more difficult to get a handle on.

But not with your balance sheet in hand. This common accounting statement can provide a wealth of information on where your cash is going each month. Usual suspects include:

Customer and Supplier Financing

A large amount of cash may be tied up funding your customers or suppliers. For example, if you allow your customers 60 days to pay their bills, you are essentially giving them a 60-day loan.

Likewise, if you are buying more inventory than you can produce or sell right away, or paying cash on delivery instead of waiting 30 days to pay suppliers, you are extending credit to your suppliers.

On your balance sheet, customer credit is listed as “accounts receivables,” while vendor credit is listed as “accounts payable.” If you notice accounts receivable is consistently and significantly larger than accounts payable, you are financing your customers to a greater degree than your vendors are financing you.

The key to managing these costs is to align your customer and supplier payment terms, so you limit the amount of money tied up financing both.

Inventory Carrying Costs

A significant amount of your cash reserves may be tied up in financing inventory. Inventory carrying costs are the costs of storing and handling raw materials, unfinished products or finished inventory in your plants and warehouses.

The longer inventory sits around, the more cash is tied up. So, maintaining low inventory levels does improve cash flow. A good rule of thumb: If the inventory you carry on your balance sheet is much larger than your sales in a given year or business cycle, you may want to re-evaluate your inventory levels.

Equipment and Facilities Financing Costs

If you are in a capital-intensive industry that requires heavy machinery, specialized tools or expensive facilities, a big part of your cash may be tied up in financing these capital investments or capital equipment purchases, as they’re called on your balance sheet.

  • Capital outlays can vary tremendously by industry. For example, car manufacturing is capital intensive, requiring large investments in equipment to keep production going. Others, like consulting, rely on human capital.

Regardless of how capital intensive your industry may be, the secret to success is to make your capital work harder than your competitors with better productivity, capacity utilization and smarter financing.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

Related

Investment and Insurance Products:

Are Not FDIC or any other Government Agency Insured   Are Not Bank Guaranteed  May Lose Value 

© 2018 SunTrust Banks, Inc

equal housing logoSunTrust Bank is an Equal Housing Lender. Member FDIC

equal housing logoEqual Housing Lender. SunTrust Mortgage, Inc

SunTrust, SunTrust Mortgage, SunTrust PortfolioView, SunTrust Robinson Humphrey, SunTrust Premier Program, AMC Pinnacle, AMC Premier, Access 3, Signature Advantage Brokerage, Custom Choice Loan and SunTrust SummitView are federally registered service marks of SunTrust Banks, Inc. All other trademarks are the property of their respective owners.

Services provided by the following affiliates of SunTrust Banks, Inc.: Banking products and services are provided by SunTrust Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank, SunTrust Delaware Trust Company and SunTrust Banks Trust Company (Cayman) Limited. Securities, brokerage accounts and insurance (including annuities) are offered by SunTrust Investment Services, Inc., a SEC registered broker-dealer, member FINRA, SIPC, and a licensed insurance agency. Investment advisory services are offered by SunTrust Advisory Services, Inc., a SEC registered adviser. GFO Advisory Services, LLC is a SEC registered investment adviser that provides investment advisory services to a group of private investment funds and other non-investment advisory services to affiliates. Mortgage products and services are provided by SunTrust Mortgage, Inc.

SunTrust Mortgage, Inc. - NMLS #2915, 901 Semmes Avenue, Richmond, VA 23224, 1-800-634-7928. CA: licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, IL: Illinois Residential Mortgage Licensee #MB-989, Department of Financial and Professional Regulation, 100 W. Randolph, Suite 900, Chicago, IL 60601, 1-888-473-4858, MA: Mortgage Lender license #-ML-2915, NJ: Mortgage Banker License - New Jersey Department of Banking and Insurance, NY: Licensed Mortgage Banker—NYS Department of Financial Services, and RI: Rhode Island Licensed Lender.

"SunTrust Advisors" may be officers and/or associated persons of the following affiliates of SunTrust Banks, Inc.: SunTrust Bank, our commercial bank, which provides banking, trust and asset management services; SunTrust Investment Services, Inc., a registered broker-dealer, which is a member of FINRA and SIPC, and a licensed insurance agency, and which provides securities, annuities and life insurance products; SunTrust Advisory Services, Inc., a SEC registered investment adviser which provides Investment Advisory services.

SunTrust Private Wealth Management, International Wealth Management, Business Owner Specialty Group, Sports and Entertainment Group, and Legal and Medical Specialty Groups and GenSpring are marketing names used by SunTrust Bank, SunTrust Banks Trust Company (Cayman) Limited, SunTrust Delaware Trust Company, SunTrust Investment Services, Inc., and SunTrust Advisory Services, Inc.

SunTrust Bank and its affiliates do not accept fiduciary responsibility for all banking and investment account types offered. Please consult with your SunTrust representative to determine whether SunTrust and its affiliates have agreed to accept fiduciary responsibility for your account(s) and if you have completed the documentation necessary to establish a fiduciary relationship with SunTrust Bank or an affiliate. Additional information regarding account types and important disclosures may be found at www.suntrust.com/investmentinfo.

SunTrust Robinson Humphrey is the trade name for the corporate and investment banking services of SunTrust Banks, Inc. and its subsidiaries, including SunTrust Robinson Humphrey, Inc., member FINRA and SIPC.