QUESTION:I have a 2 to 1 ratio of assets to liabilities, yet I sometimes find I am running short of cash needed to pay monthly expenses. What am I missing?

ANSWER: Based on what you are saying, it would appear that you are short on “liquid assets.”

These are cash and assets that can be quickly converted into cash with no loss of value. If the asset is a stock, bond or certificate of deposit it must be actively traded on the market to qualify as a liquid asset.

Money that is owed to you that you expect to receive within a month can also be counted as liquid. However accounts receivables over 30 days are not current and may be doubtful. Physical assets like inventory, supplies, buildings and equipment are not considered liquid assets.

There are many reasons for cash flow shortages: a slump in sales, seasonality, unexpected expenses and late-paying clients.

Bottom line, cash is king, and if you do not have enough money in your checking account to pay your monthly bills you do, indeed, have a problem. To correct this deficiency you should consider the following:

• Develop a line of credit with your bank. This is extremely useful for businesses that experience seasonal ups and downs. You do not incur interest charges until you draw upon the credit line.
• Age your accounts receivables, grouping them as current, 30-60 days, and over 60 days. Call any customer over 30 days and consider a collection agency for those more than 60 days in arrears. Better still, insist upon payment at point of sale wherever possible.
• Negotiate longer payment terms with your suppliers. Most everything is negotiable, and you have nothing to lose by asking for more liberal payment terms.
• Keep track of when your expense items come due. Some are due monthly like rent and utilities. Others like insurance, taxes and replenishing inventory may be quarterly or once a year.

SCORE offers a 12-month cash flow Excel spreadsheet that enables you track your monthly income and expenses. Each month you replace the estimated with the actual income and expenses paid. By keeping the spreadsheet current, you will be able to budget accordingly. To access the form, go to naples.score.org/resource/12-month-cash-flow-statement.

Note – Be sure to allocate an additional 10% to “miscellaneous” to account for an unexpected expense.