Page 62 - Finance for Non-Financial Managers

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The Balance Sheet
Often a company will
Delay Can Pay
show other amounts it
owes under separate labels If a company can earn 12% 43
annually by buying and
in order to make sure reselling merchandise, it can earn
readers of the report know almost 1/4% on every dollar that it
that there are amounts due can delay paying its creditors by a
for these “special” liabili- week.A company with an average bal-
ance of $50,000 in accounts payable
ties. Wonder Widget’s bal-
could earn about $115 a week or
ance sheet shows income
$6,000 a year. Of course, it may not
taxes payable as such a
be worth it if the company incurs
category. additional charges or jeopardizes its
standing with creditors.
Accrued Payroll
Next on Wonder Widget’s
statement of financial condition—remember that alternative
name for a balance sheet—is this account, which represents the
amount earned by employees but not yet paid to them. Since
employees are typically paid for time already worked, not in
advance, every company has some amount of compensation

The Cash Squeeze—Don’t Get
Caught in the Middle!
Keep this thought in mind: despite all the headlines
around bank lending practices, venture capital investing, public offerings
of stock, etc., the largest single source of operating capital for most
businesses is the money they borrow from their creditors, that is,
accounts payable.Almost every entrepreneur has a few stories about
the struggles he or she went through to squeeze more working capital
out of his or her balance sheet.This usually means increasing available
cash by delaying payment to creditors, while at the same time trying
to make sure their customers don’t do the same thing to them.
Sometimes the squeeze play goes against you.The company can’t
collect its accounts receivable on a timely basis, and its creditors won’t
let it slow down its payments.The result can be a disastrous cash flow
crunch! Companies in the construction industry often face this.Their
customers hold up payment for unfinished loose ends on a project,
while their subcontractors insist on being paid to prevent mechanic’s
liens from being placed on the property.