Cash: Stewardship & Reality

It’s been a while since I heard business owners talking about their cash. I’m sure they think about it all the time, maybe even check it each morning, but it’s only one of several important numbers to help gauge the health of the business. In construction, these include the cost to complete current jobs, the line of credit balance and limit, and the work backlog.

At several industry events in recent weeks, the topic of cash seems to be back on the table. Two of the questions I’m hearing lately are:

I have some cash reserves; how can I put that money to work?
The cash balance is healthy, so I’m making money; right?

Let’s start with the ‘good’ problem! We’ve seen a growing number of clients with healthy cash balances. They want to keep the funds in the business, their loans have locked-in low interest rates, or they have no debt, and most business savings accounts have awful interest rates.

There are several great options to put the funds to work without tying them up. One is through a financial broker, and another is available from many business-focused banks. In both cases, the goal is to pool funds across banks to keep the money safe and within the FDIC insurance limits. From the business side, it acts like a money market, allowing you to move funds in and out of the interest-bearing account; there are usually some limits to the number of transactions in a given time period. On the other side, the funds are spread out across several banks to stay within the $250,000 FDIC limit. The bank or entity with which you have the account gives you one statement, and has a list of banks they work with.

One example of the broker-style product is Flourish Cash. Unlike a bank, you can’t just ‘sign up.’ You are referred through your financial broker. This is an online platform and all moving of funds is done through their portal.

Several banks offer a similar product. It is a money market-type of account with competitive interest rates. Transactions can be done online or at the local bank. As funds exceed the bank’s FDIC limit, they are spread out across several banks to keep the money under the FDIC limits.

What about the second question? There is a temptation to think that if you have cash, the business is profitable. Although that might be true, and we certainly wish this for you, it’s important to get all the facts, not just the cash balance!

Most owners know they have to consider their accounts payable. It’s also important to know whether all the AP has been entered, so check with your accounting team. You may tend to discount the Line of Credit (LOC) balance since you only owe the interest, but with interest rates where they are, keeping these balances as low as possible is cash in your pocket! When rates were so low, the cost of money was not as big an issue, but with prime around 8%, this is expensive money!

Perhaps you’ve heard the term ‘Cash Flow.’ It’s definitely about the flow of cash including your receivables and when they’ll come in, your payables and when they’re due, servicing your line of credit, and knowing your overhead expenses (your regular costs whether you have one job or one hundred). But there’s more! Perhaps you have equipment loans, vehicle loans, or maybe even a building mortgage. These usually sit on the balance sheet (assets and liabilities) and are easy to miss when looking at your Income Statement (billing less direct costs, less overhead). These debts need to be paid down with after-profit earnings. In the case of an LOC, the funds are already deposited and probably spent, so with future earnings, you need to repay them.

Don’t forget equipment depreciation, end-of-life equipment that needs replacement (including computers!), and then there’s growth! It’s an investment to open new markets.

For many of you, the financial software you use has one or more dashboards. For some, we’ve helped create extended dashboards in Power BI. Most of these have ‘Cash Position’ sections. Be sure to consider long-term debt before you spend that cash! – CMW