Cash is king
You’ve heard it before. Cash is king! But why is cash important and when does it matter?
Cash isn’t the sales and bills you’re processing, it’s what you actually have right now available to spend. In any business it is one of the most important things. It can make or break a business, you might make tons of sales on credit but without cash you can’t pay the bills!
You always need cash
The problem many businesses seem to have is that they take cash for granted. Small business owners can become too focused on the profits, which might be great, but sales on credit aren’t cash and many people don’t realise the difference!
Profit is an accounting concept, in simple terms it’s your sales turnover less all expenses incurred. It’s very true that profit is the single most important reason you are in business, you are in business to make money after all!
Cash on the other hand, is what you need to pay your bills. It’s the bread and butter of the company and you cannot operate without it. Working capital management is key to running an effective business.
Whats the problem?
The problem is, people tend to think in profits rather than cash. We’re all guilty of it. It’s just the way of business, we’re programmed to think of what we get from a product less what it costs to sell the product as the bottom line.
Unfortunately, we can’t spend the profits from the business. We spend cash. There are many businesses who go bust because although they had large profits, their cashflow had major problems. Overtrading is one way that businesses find this problem, they take on a large amount of sales, only to realise they have ran out of money to buy the materials.
We recognise sales when they are invoiced, not when we receive the cash. This is what can mislead the company into thinking they are in a healthy position. Yes, we may have just secured a £100,000 sale, but if that takes two months to get paid, that’s two months without money. During this time in order to fulfil the sale, we may incur £50,000 of costs. This will usually need paying before the sale is made. You can clearly see here that we need that money.
The moment you have to pay someone you owe, and you can’t, that’s the point in which are you technically insolvent (out of business). This isn’t a predicament you want to be in, even if you can get out it, the time spent can be emotionally and psychologically draining. It’s better just to monitor and manage your cashflow.
How can we monitor cashflow?
Take a look at your most recent bank statement. Look at what has come in and out over the last month, how much money you had at the start and the end of the month? Are you in a better or worse position? Doing this regularly will help you keep on top of assessing whether you need more cash to pay your bills.
Profit is Sanity
Cash is Reality