Resolving financial distress

As we approach the end of the first quarter of the new year you probably have a good idea of what happened, financially, for your business in 2022. You have closed the books and are now digesting the results in an attempt to carry forward successes and address issues.

One of the most common challenges is to determine what happened and WHY. The financial cause-effect relationships that exist in every business are important to know and understand when working to improve performance.

I thought I would share one of my favorite financial diagnostic tools to help illustrate the interrelationships between several aspects of cash flow. Below you will see a comprehensive and easy to visualize map of how cash flows in virtually any business.

The way to use this map is as follows:

1. Identify one of the GREEN “symptoms” rectangles.

For example: Let’s say your business is experiencing “LOW CASH”

2. To understand what causes “LOW CASH” trace the arrow “upstream” to find the primary contributors to this condition:

• High Current Liabilities

• Too Much Inventory

• Too Much Customer Credit

3. And to determine what “LOW CASH” causes or impacts trace the arrow “downstream” – in the direction of the arrows:

• High Borrowing

• No Cash Discounts on Payables

Using a tool like this road map can make it easier to understand what issues you may be experiencing AND what areas of your cash cycle to focus on to improve your financial performance. I encourage you to take a look at your 2022 financial reports and identify an area or two for you work through and improve.

For help with this and other tools to improve your business feel free to reach out to your local Small Business Development Center adviser.

This article was prepared by Jerry Petrick, MBA and certified business adviser with the Washington State University Small Business Development Center (SBDC). Jerry provides no-cost, confidential business advisory services by appointment. He can be reached via email at jerry.petrick@wsbdc.org