Imagine for a moment that your car is really dirty, so you’ve decided to wash your car, and you’re going to do it by hand. You gather everything you need–soap, bucket, sponge, chamois cloth–and head out to the hose. You squirt some soap into the bucket, turn on the hose and start to fill up the bucket with water. When the bucket is full, you turn off the water, take the bucket over to the car and start to wash away the dirt.
You start by cleaning off the trunk and, when you have washed all the dirt away, you go to dip your sponge in the bucket of water, only to find that the bucket is empty! It was full just a minute ago–what happened?
Well, unknown to you, the bucket has a hole in it. The hole is not easy for you to see, but it’s large enough to cause all the water to drain out in a short period of time. What do you do now? Your car is still dirty and you don’t have any soapy water to clean it with.
If you had taken the time to inspect the bucket before you started, you would have noticed the hole, and you could have fixed it or bought a new bucket before you started so you wouldn’t be left without any soapy water when you wanted to wash your car.
Let’s take this lesson and see how it applies to your business. Perhaps you want to buy a new piece of equipment, or buy some extra inventory to take advantage of supplier discounts. You’ve had some pretty good sales lately, and by your reckoning, there should be a healthy balance in your cash account. So you make all the purchase arrangements and, on the day payment is due, you go to the make out a check for the payment. You open your checkbook and–wait a minute–where did all the money go?
There should be a lot of money in the account. After all, you’ve been steadily filling up the account with cash from sales, just like you filled up the bucket with soapy water. But, just as the water disappeared from the bucket of soapy water, when you went to use the cash, it was all gone. What happened? Looks like you had a hole in your cash account. You couldn’t see it, but it was large enough to cause the cash to drain out when you weren’t looking.
What do you do now? You still need the equipment or inventory, but you don’t have any cash to pay for it.
If you had taken the time to inspect the cash balance on a regular basis, and if you had proper accounting controls in place, you would have noticed the hole, and you could have fixed it before all of your cash was gone, and you wouldn’t be left without cash when you needed to buy more assets for your business.
The point is that there are a lot of ways to lose money. When we consider overall financial management, we typically think of a loss as something that occurs when our costs exceed our revenues. But you can also lose money–and a lot of it–if you don’t have proper accounting controls in place, and if you don’t do an inspection every now and then to make sure the controls are working.
So, if you haven’t done so lately, call your accountant and ask them to come over and take a look at your internal systems, procedures and controls. Make sure you don’t have any leaks and, if you do, plug them up right away. That way, the next time you go to pay for an asset, you can be certain that your account has exactly the amount of cash that you thought it did.
And who knows? If you get a really good deal on that purchase, you can use the savings to take your automobile to a car wash so you don’t have to clean it by hand.
