The Effects of Accounts Receivables, Debt and Expenses on Cash Flow

August 17, 2011

In the past, I've mentioned that it's very possible for a company to show profit when it could very well go out of business. Basics of Accounting Are Vital to Survival for Entrepreneurs tells the stories of several businesses in this situation and how they escaped bankruptcy.

Accounts Receivables Pile up

A company that manufactures ceramic tiles had over $100,000 in accounts receivables. This means they provided the product, but they had not received payment.

If you look at an accounting report, it can easily show this company has over $100,000. But that's not in the bank. The company needed to continue paying employees and its own bills even though customers haven't paid. Also, some of the invoices were over six months old.

After working with a consultant, the company shrunk its accounts receivables to $30,000. Unfortunately, the company won't see a dime on some because many of the companies went out of business. That's why it's important to take care of those accounts receivables as fast as you can and require payment within 30 days, or whatever timeframe you set.

Growing Debt

A paper shredding company went to a bank for a loan to pay for a shredding truck. The company did well enough to add another truck, and took out another loan. That increased the amount the company owed the bank as it still needed to pay back the loan plus interest.

A loan can mislead someone who isn't familiar with accounting into thinking there's profit, when it's actually debt. The company needed to shrink its debt in order to survive, which it did by selling equipment. It also stopped serving non-profitable clients.

Unbalanced Revenue and Expenses

You know it takes money to make money, but sometimes it can be too much. A lawyer spent the bulk of his revenues on advertising. As revenue climbed, he increased spending on advertising. He would never get ahead in the game when the expenses climbed with the revenue.

The lawyer cut advertising, had fewer clients, charged them more because he spent more time on their cases and saw his profits double. Instead of advertising, he gained more business through client referrals. Referrals didn't cost anything except making sure he took care of his clients.

These show the advantages of accounts receivables financing over a loan or line of credit from a bank. If you're not sure what accounting numbers mean, get help whether it's from an accountant, bookkeeper or a consultant. Your employees may just need a little education and it can avoid what these companies went through.

If you don't know where to start, contact us and we'll help you figure it out. No obligation.