If you're running a business, there are three things you need to be paying attention to on a weekly basis to make sure you don't run out of cash, because this is what kills companies. The first thing is, is your cash balance. Now there are some nuances here, so I want to explain.
When it comes to your cash balance, you may be wondering, where do I get that? The easiest way is to just log on to your bank, so go onto your bank account and look online and see what the balance is as of that day. Here's the problem with that though, it doesn't account for things in transit. So for example, let's say you cut a check and you send it to a supplier, like an actual paper check.
Well, if they haven't cashed it yet, it's not going to be reflected in that cash balance that you're seeing online, and therefore your number may be skewed. That's why I always recommend business owners to look at the cash balance within their accounting system. So for example, if you use QuickBooks or Oracle or some other type of system, there is a feature in there where you can connect your bank account to the system and download your transactions on a daily basis.
And this is really important to have your controller or your CFO or your bookkeeper, whoever you have maintaining your accounting to do, because when you download those transactions, you're updating the cash balance in your accounting system in real time. Also, if you're cutting checks out of your accounting system, then those items that are in transit are going to be reflected in the cash balance in your accounting system. So you can look at your online balance as a quick and dirty number, but really the best balance to be paying attention to is in your accounting system, but it has to be updated on a regular basis.
So when I was working with my team and when I talk with other bookkeepers and accounting managers, I always say, this is a part of your daily duty is to go in there on a daily basis, download all the transactions that hit your bank account, reconcile them. So we have an up-to-date cash balance because this is critical. This is the lifeblood of your business, and therefore you need to be measuring that.
Number two is the spread between your AR and your AP. Now, just remember AR is when you go out there and you do work for a customer and you give them an invoice. So here's my little invoice.
And you say, Hey customer, I finished the work. You could pay me in 30 days. And the customer says, all right, I promise to pay you in 30 days.
Sometimes they don't pay you in 30 days. Sometimes it's like 45 days, right? But let's just assume it's 30 days. So you have this money here and let's say you've racked up a hundred thousand dollars in accounts receivable with your customers.
And then over here, you have accounts payable. This represents when you go and you buy, we'll just say a box of supplies or materials or whatever from your supplier. And you say, I will pay you promise in 30 days.
All right. So you rack up money with your suppliers here. And let's just say it's $50,000 that you have on account with your supplier.
The spread between these two numbers then is $50,000, which means you're expecting to collect a hundred thousand dollars from your customers and you need to pay your vendors or your suppliers 50,000. So the spread right here is good and healthy. If this was negative, that would be a bad sign because it reflects that you have less money coming in the door to cover the amount of money you owe vendors, others, right? So this is the spread I would definitely pay attention to and make sure that it's growing, if anything, and not shrinking, right? Number three is your backlog or your pipeline, just depending on what business you're in.
So in construction, we would always look at our backlog and that was the amount of work that we had signed contracts for or verbal commitments to, and we'd add up those values so we could see how much work we had to complete. That was on the books, theoretically. Now signed contracts, we're pretty much like a hundred percent sure.
Verbal commitments, we would discount at like an 80% rate because some of those, even though they were verbally committed to, would fall through, right? So a contract is never a contract until it's signed and until you have some type of deposit. That's how I operate. But knowing your backlog, your pipeline, that could be the amount of MRR or ARR if you're in the tech space, right? The amount of recurring revenue that you expect, your pipeline, your backlog of number of bookings or whatever it may be, but I want to see how much I have coming down the pipe, right, to feed these parts of my business because your backlog is going to feed your working capital and this is going to ultimately end up in your cash balance if you do things profitably.
So those are three quick things you can start measuring in your business on a weekly basis, your cash balance, your spread between your ARR and your AP and your backlog. You can always add to it. So for example, you get more sophisticated here with your working capital and layer and inventory and other things.
But for now, just keep it very simple. Start measuring these things and then make adjustments along the way. Build, measure, learn, adjust.
And that's what I have for you. If you ever want to talk about this and how it relates to your business, you can always book a free strategy call by going to Coltivar. It's 20 minutes long, no pressure whatsoever.
We're just there to be helpful to you. Right. Until next time. Take care. Cheers.
