Many companies watching their cash closely produce daily cash flow reports to help management stay on top of that all-important resource. One of my clients produces a daily report that also shows the balances of accounts receivable and accounts payable. As of today, the accounts payable ("AP") total is 50% larger than the total of accounts receivable ("AR").

Quick quiz: What does that tell you about the company? 

Quick answer: First, they've slowed down their payment of suppliers to conserve cash, a smart move when you can do it, especially when your customers are slowing down their payment to you.

But is that the case here? Clue: when customers slow down their payments, AR gets bigger, not smaller. In this case AR is smaller than AP. The real answer then, and the important point to get from this post, is that sales have slowed and the AP slowdown is an attempt to fill the cash void left by slowing sales and resultant slowing collections. Now a smart cash management strategy has a time limit. It buys you time to fix the more critical problem, slowing sales or worse, "profitless sales." You can only slow vendor payments for so long before your suppliers start talking COD, collection agency, no ship, and other ugly words.

If your AR is larger than your AP, as a general rule it shows you are making a profit on your sales that have not yet been collected. If it's the other way around – see above – it likely means one of two things: (1) your sales don't have (enough) profit in them and your cash flow is reaching the critical point, or (2) you may be close to borrowing as much as you can from your suppliers, and your cash flow is reaching the critical point. In either case, you need our help.