Unearned Cash — Don’t overestimate your ability to meet commitments.

Laurent Guichard
Jul 10 · 5 min read
Master this portion of treasury that doesn’t belong (yet) to you. Decrease your exposure to operational risks.

Master this portion of treasury that doesn’t belong (yet) to you. Decrease your exposure to operational risks.

The purpose of this paper is to help the company’s leader, the CEO or its founder to control a part of the operational risk and have an impact on its treasurership.

We focus on cash inflows from the company’s operations. It does not take into account financial income from bank interest, financing or investments made by the company.

“Feeling” its cash is a “must” for business managers. Especially when the company is strongly growing or is making significant investments.

Interests to monitor your company’s unearned cash

Manage your debts towards your customers to reduce the weighty risks to your cash flow.

  • by knowing at anytime this amount of your finances that doesn’t belong to you;
  • by getting assured of their good consumption of received advances;
  • by making sure you close credit notes regularly;
  • by becoming aware of the number of days’ sales you will have to finance from the company’s own funds if you had to spend all this amount of money that doesn’t belong to you;
  • by knowing the average percentage of your sales that you must repay to your customers due to poor service performance.

Treasury, some reminders

The treasury of a company constitutes the concrete means of honoring its commitments.

In this context, the treasury allows you:

  • to pay your suppliers;
  • to pay your staff;
  • to pay yourself;
  • to pay your shareholders;
  • to make investments.

“Feeling” its cash is a “must” for business managers. Especially when the company is strongly growing or is making significant investments.

Neglecting the money that your company does not have is the same as overestimating its ability to meet commitments.

Overestimate your ability to meet your commitments, the first step to critical issues.

Having a too small amount of liquidity is a first step towards the negative spiral: not enough cash → difficulty to pay suppliers or raw materials and personnel → difficulty to execute contracts → deterioration of the customer’s confidence → degradation of the notoriety → less incoming business → less cash still.

Having enough treasury allows you to borrow in order to save some cash stock and protect yourself against the risk. It’s a great move to borrow money from a credit agency when you don’t need it as it provides you the means to deal with customers who do not pay their bills on time, to face extraordinary expenses, or achieve your investments.

Reasons for money movement between a company and its customers

Money movements with your customers may have different reasons:

  • in advance of service to render up;
  • in exchange for a rendred service;
  • due to the poor performance of service.

This incoming money, therefore, does not have the same value and it does not generate the same level of risk.

Each money movement needs to find a justification.

In advance: if the service is never delivered, it can never be recognized. This will remain a debt towards your client.

In exchange for rendered service: this money is acquired to you, subject to contractual provisions allowing a refund (for actions of the type cashback, customer satisfied action or refunded).

Because of the bad performance of a contract: this money is permanently lost and constitutes a debt to your customer, that you’ll refund the amount in hard cash or stumbling or good to be worth on his next order’s occasion.

Received advances

When your company has received advances, it’s important for you to know at any time its level of consumption because:

  • a new advance might have to be claimed if the received advance is almost entirely consumed
  • a decision must be taken at the end of the financial period: should this advance be returned to the client or should be kept as a debt at the year-end?
  • an invoice must be issued if you deem that a part of the work may be “billed” and the advance may be recognized in whole or in part as turnover.

In your advances’ management, you have to consider:

  • still owing amount: this amount corresponds to what you may have to return to your customer if the work to be rendered had to stop.
  • the advance’s seniority: at maturity, the unused amount must be returned to its owner, in principle, your customer.
  • the advance’s consumption: Consuming its advances regularly reduces the cash flow risk by immunizing the consumed portion versus the risk of restitution.
  • the days of sales’ amount represented by the remaining sum: this is the risk to which you expose yourself in case you have to spend everything today.
  • Advance status: Your business may not start until the advance is paid.

Amounts to be returned to your customers due to the poor contract’s performance

Your company may have to repay to its client all or a part of the paid amounts because of a work done, a service rendered or the sale of a product.

Each of these amounts is not repaid as a debt to your client, whether this amount is to be paid back in cash or to be claimed on his next order. In this case, you only postpone the payment of your debt.

During this management, you may consider:

  • the amounts to be returned, and to whom
  • the age of these amounts
  • and the status of these amounts: everything that should have been paid could be paid today and at once.

It is also interesting to note the percentage of turnover that must be returned to your customers. It constitutes a weak indication of the quality of your work and customer satisfaction.


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Laurent Guichard

Written by

Founder. Inspired sometimes. Husband, father of two.

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