The balance sheet’s all done, but there might be some missing information down below the end of the balance sheet.

What might that be?  The net cash balance.

This applies only in certain situations.  This will be when your company has deposits from customers or deferred revenue liability.  The latter can happen when you receive money from customers for subscriptions or licenses that cover an extended period of time, such as 12 months, and the revenue needs to be recognized over a period of time.  This money you receive from the customer first goes into the deferred revenue liability account.

The net cash balance would be a memo line down below the balance sheet.  It represents the difference between what you show on cash, less the customer deposits and deferred revenue liability.  So, for example, if you had $100,000 in the bank and you had deferred revenue liability of $50,000, your net cash position would be $50,000.

Why show this?  Because this number represents what cash you’re really free to spend.  It represents good financial discipline.

Otherwise, without it, you see the cash number on the balance sheet and you can feel like that cash is yours to spend.

What we want to avoid happening is you spending that cash and then not having enough money around to cover the cost of meeting the customer needs, such as the cost to print the subscriptions that they prepay for upfront.  Let’s look at another hypothetical situation.  In this case, suppose the cash on hand was $100,000, but the deferred revenue liability was $300,000, this would show a net cash deficit of $200,000.

What this means is the company has borrowed from the future to pay the operating expenses of the current.  That’s poor fiscal management and the company could get in a more serious squeeze if future subscriptions or other sources of the deferred revenues do not come in strong enough to cover their operating expenses over the next periods.  As a result, they are living worse than hand to mouth.  They are living several periods ahead on handouts to the current mouth.  It can be one of the worst financial situations to get into.

I know of a nonprofit organization that got itself into exactly that situation.  They did not capture the deferred revenue liability, so they thought they had been running financially sound, but in reality, they were really deep in the hole with cash.  What happened was then their membership renewals began falling and sure enough they got caught in a very serious cash squeeze.  They still had all the expense of taking care of the membership that had already renewed in prior periods, but they did not get the kind of new renewals to bring in the additional cash.  The nonprofit just about went under.

So, if you have a situation where you collect some money in advance, whether for customer deposits or deferred revenues, make sure you show a memo line on your balance sheet for what your real net cash position is and don’t spend your cash to the level that you pull that net cash balance into the negative.  Keep the net cash a positive number and you’ll be a much more financial sound organization.