A simple financial health tool – “The Spread”

Ain’t no financial problems sneaking up on me!

I measure the “Spread” in all my businesses and put it on a chart.

Here’s what it is – Cash = Receivables – Payables = The Spread

If you are a business that carries a lot of inventory, then you can measure the Spread and the Spread = Inventory.

Here’s why this is important – Cash is king.  Run out of it, and you are out of business.  So the reason you measure the spread is so you do not run out of cash.  Receivables are a predictor of what money should be coming in, in the next 30 days. 

Receivables are when products and services have been delivered and billed, but not paid for yet.  

Payables are billed to you or expenses you incurred or accrued, but have not yet been paid for.  They are a predictor of money that has to go out within the next 30 days.

So the NET of Cash = Receivables – Payables is The Spread.  

I make a chart with a green line for cash, a yellow line for receivables, a red line for payables, and a blue line for the Spread.  I have four years’ worth of data in my chart.  I can see what the Spread was last month, last year, and the direction it is going.  

I pick a number I am comfortable with to keep the Spread at.  For example, in a company that does one million a month, I may want $800,000 in The Spread.  When it gets over that, I take a distribution of the overage and bring it down.  When it is under the target, I do not take any distributions.

This, of course, does not change how much money you or the company make, just the timing of you taking money out.  It ensures you do not run out of cash.  

Chart yours out each month.  Your bookkeeper or accountant can do it and give you the chart when they give you the financials for the month.  The numbers are easy to get from the balance sheet.