What Is Fake Cash?
In this week’s issue…
Knowing What's Real
250 words, total reading time <2 minutes
What has struck us for years now, is the confusion on cash in the business. Most operators believe their bank account gives them the best indication of cash. In some businesses that might be true but in a high deposits (pre-pay) business like yours; it couldn't be further from the truth.
In fact, your checking account may be the source of "fake" cash. Why?
Because liabilities like client deposits, accounts payable (owed to your vendors), and credit card balances can all distort the real cash in the business.
Examples of clouding the cash picture:
Client Deposits its not your cash its a gift card given to you in advance for work to be performed and goods to be delivered.
Credit card balances are a deferral of cash and because they are often are used to float expenses; they can cloud the cash picture.
So to get a better indication of true cash: we recommend taking the cash in bank less client deposits plus assigned to projects inventory to get to a NET CASH number.
What's the proper level of cash you should keep in the business?
We use cash coverage of deposits to determine that. You take your bank cash + assigned inventory and divide by your total deposits. If it is 2.0 or better you are cash healthy. If it is under 1.0 you are borrowing money against deposits to run the business not an ideal situation to be in.
Focus on building net cash and you will reduce the time you spend over-reacting and worrying it.