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Tuesday Morning Coffee

Tuesday Morning Coffee

VITAL Question # 3

Posted on February 25, 2014 at 11:50 AM

How Much of the Cash You Have, Is Yours?

and ... how do you account for it in the interim?

  Cash is a critical measure in any business. But how much of the cash your company has, is actually yours? Unless you properly account for advance customer payments, the answer is unclear.

  Just as Best Buy is not allowed (by law) to recognize revenue when they take payment for a gift card, you should not count customer payments for future work as income. Until the work has been performed, and any portion of the payment can be applied to a customer invoice for that work, the unapplied payment should be classified as a Customer Deposit Liability.

  One of our VITAL Signs is Deposit Coverage - cash plus inventory, divided by the "unearned" deposits you have on hand. E.g., a cash balance of $65,000, with inventory of $205,000 and $150,000 of customer deposits, yields a coverage ratio of $270,000/$150,000, or 1.8. That's OK, though a coverage ratio of 2+ should be a minimum goal. A ratio of 3 or higher generally indicates a solid financial condition.

  On the other hand, if you are recognizing revenue as payments are received, you cannot see "work owed" on your balance sheet.  And not all integration companies maintain an inventory asset, either.  Without both of these key measures, the "how much is yours" answer is decidedly unclear.


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