Where’d my money go?

Have you ever asked that question? Now I’m married with four kids so it doesn’t take me long to answer that question. I’m talking about in your business. Do you know where your money went?

I was working on a project recently for a business that has five related “sister” companies. One of these related companies was the focus of my conversation with one of the owners. The company had been around for several years, it was profitable, but neither he nor his partner had ever taken any distributions or dividends out of the company. And while there was a reasonable amount of cash for operating needs in the company there wasn’t a pot of gold – so “where did it go?” he asked me.

The answer, it turns out, isn’t that complicated. Here is how you calculate it:
1) First you start with the money that was used to begin the business, also known as Capital
2) Next you add the cumulative net income for the business from inception to date
3) Add any amounts borrowed from banks as of the date you’re doing this analysis
4) Don’t forget to add the total amount of Accounts Payable

Ok, that’s how much cash has been put into the business, either by you or others; now let’s look at where it went:
1) Subtract the net amount of fixed assets as of the date you’re doing this analysis
2) Do the same thing with Inventory
3) Don’t forget to subtract the total amount of Accounts Receivable

After you’re done, the net result of the calculation above should equal your cash on hand.
In the situation I was in, it became pretty obvious when we were done where the money went…it went to pay for Inventory and A/R, plus some of the fixed assets, though most were paid for by bank financing.

So is that the end of it? Are there any options to create cash where none exists? Actually there just might be. In this situation the Inventory and A/R were “unencumbered”, which is a fancy way of saying they weren’t tied up as collateral for financing.

Many banks will loan up to a certain amount of a business’s inventory and A/R. This sort of financing is usually in the form of an Operating Line of Credit. The business must report monthly the values of its inventory and A/R which equal its “borrowing base”, within certain limits the business can borrow up to the limit of the borrowing base.

Using a LOC may or not be a good fit for your business at this time, that will have to be blog post for another day. The point here is that you can figure out (rather quickly and easily) where your money went.

About the Author

+Geoff Chinnock is a principal with Morrison, providing business valuations, business planning (including budgeting, cash flow forecasting, strategic planning), feasibility studies, interim executive CFO services, competitive grant writing and special projects that don't fit into any conventional category. You can contact Geoff directly at gchinnock@morrisonco.net or via telephone at 530-893-4764 ext. 204.

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