Tips for balancing inventory, payroll and cash flow

Take a holistic approach to managing a company’s finances

Many business owners are in a position of creating net income but are constantly challenged with meeting payroll and other current obligations, while also keeping cash on-hand. This is an all too common scenario among growing businesses and businesses that rely on current accounts; inventory, accounts receivable and accounts payable.

I recommend a holistic approach to managing a company’s income statement and balance sheet, which can help management stay cognizant of costs and cash effects and offer a more accurate financial picture.

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) is a vital number for business owners to understand as the valuation of many businesses in the acquisition markets is predicated on EBITDA.  Yet relying solely or focusing too intently on EBITDA can create problems for any company and particularly a rapidly growing company. Management of the business on a daily basis, however, is in many cases, less dependent on income and much more dependent on true cash flow. 

Proper cash flow management for a business is typically calculated with either the Financial Accounting Standards Board 95 (FASB 95) or Uniform Credit Analysis Cash Flow Statement (UCA).  EBITDA is completely reliant on the income statement, while these cash flow methods use a combination of the income statement and the balance sheet. This is important as the balance sheet has a significant impact on actual cash. While FASB 95 and UCA differ in where the general ledger accounts are input, they both are relatively consistent through net cash provided by operating activities, which is the heart of true cash flow.  

The following are the top three keys to balancing business cash flow.


Inventory is often overlooked and is one of the first areas of cash usage that a small business owner is faced with. Increasing sales will often require additional inventory and if the carrying time of the inventory exceeds the terms that the business owner can obtain from suppliers, it is a direct impact to cash. Typically financed to some degree by accounts payable, start-up businesses are often challenged as they typically pay cash on delivery for inventory or may have net 10 day terms.

As companies mature and develop relationships, the payables can finance 30 days or more of inventory. When inventory is liquidated, this will typically supply additional cash if the inventory is not immediately replaced. Mature companies often use a “just in time” inventory system where they will hold inventory for a very short period of time and take advantage of the vendor terms to create cash for the company.

Accounts Receivable

High growth companies can find themselves in a cash crunch due to the amount of receivables outstanding. Days receivable is one of the more important calculations a company can do, as this will measure the number of days that a receivable is on the books, or the amount of time it takes to convert a sale to cash. As cash is needed to pay vendors, landlords, debt payments and employees, the true significance of this cannot be overstated.

Accounts Payable

Accounts payable can, to some degree, help offset receivables, but only if there is excess capacity following the coverage of inventory. In most instances, even very large companies will only have a small contribution to receivables coverage by stretching payables. Maintaining a positive relationship with vendors is vital to a company’s financial health, as increasing the length of time accounts are outstanding can quickly strain these relationships.

Management of cash flow on a monthly or weekly basis utilizing a UCA or FASB 95 approach can help ensure that the additions to sales are actually adding to the value of the company and providing operating cash. Utilizing these cash flow methods can change the management thought-process from an income-centered view to a cash-centered view.  Including inventory, accounts receivable, accounts payable, as well as the long-term assets and debt into the equation, will give a much more accurate picture of a company’s health. If properly utilized, this financial management method will have the added benefit of ensuring cash on-hand is always adequate.

(This sponsored content was provided by Centennial Bank and Trust.)

David Brown is Executive Vice President, Commercial Banking Manager for Centennial Bank and Trust. He has over 27 years of expertise in the banking industry helping business owners manage their financials. Contact David at 303-643-3504 or Member FDIC.

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