Why cash is king

They saying goes ‘turnover is vanity, profit is sanity, but cash is reality’.

Whilst many entrepreneurs know this, very few actually practice this.

Cash is king is a phrase that’s often used in business to underline the importance of cash if you want your business to survive and grow.

Yes, having cash is the only way to make your business grow because without cash you can not develop your service or products, employ staff to make or delivery them, tell the world about them through marketing or then hire sales staff to bring in the deals.

Having a seemingly successful business that’s making good profit margins on healthy sales won’t save you if you can’t access enough cash to pay your suppliers on demand.

That is the simple fact.

If you spend more cash than you generate, you will soon  be talking to an insolvency practitioner, and those conversations are never good.

Even if your business has healthy forward orders and plenty of customers it is still possible to fail and run out of cash.

Cash is the lifeblood of all businesses and this is why cash flow management should become a weekly task for each and every entrepreneur.

Managing your cash flow can be challenging and require a lot of time and hard work.

But if you fail to control costs then you will suddenly find yourself with cash flow problems.

The easiest way to mitigate cashflow problems is to keep your business as lean and efficient as possible.

Cut superfluous expenditure, be ruthless.

Review your profit and loss account in detail as I guarantee that you can save at least 10% in each and every expenditure heading – even staff!

Not many business owners consider the productivity or efficiency or their team and more often that not it is the team that cost the most each month. Yet when they are only working to 60-70% utilisation or effecicent you are effectively paying one-third too much for your staff. And in most businesses this is a significant some. Despite this the majority of staff will always tell their managers and the business owner that they are busy.

Yet it you look at what they do with fresh eyes then more often than not you will see that there are inefficiencies in what they do, or even you may wonder why they do what they do in the way that they do it.

Systems and procedures eradicate this.

If you can document what needs to be done then you can also question why it needs to be done.

Performing this simple task will always yield more efficiencies and this will free up time. As time costs money then you will be able to utilise your staff to do more. So when you think that you need a new team member, then first of all look into how and why your existing team are doing what they do and how they do it.

If you end up spending more than you make in sales  then very quickly things will lead to disaster. This is a simple fact of business maths.

Another key cause of cashflow issues is dwindling margins.

To keep cash in your business you need to turn a profit and profit comes from margin.

Your role as the entrepreneur is to ensure that margin are as high as possible whilst keeping an eye on the competition and what is happening in the marketplace.

Of course, having a good margin does not in itself generate cash. It is sales and effective credit control that brings in the cash and the latter is where many businesses fail, they simply do not collect their debts on time to be able to pay their creditors.

More often than not this then leads to VAT arrears when entrepreneurs effectively utilise the VAT they have collected from their customers on behalf of HMRC to settle their business creditors.

Naturally HRMC do not take kindly to acting as a bank.

When we work with businesses it is not normally a cashflow problem that we find, but a business model problem in that the business simply does not generate enough cash.

This is something that many entrepreneurs fail to see – when it is their business that is broken.

They tend to see the affect, cashflow or rather the lack of it, but then can’t see the cause.

This is what we do best, we see the wood from the trees.

How do you ensure that your cashflow is accurate?

Start by getting your invoices out on time and have a system that conveniently tells you when payment is due, so you can chase late payers. To ensure that your customers pay your invoices on time then use auto reminders from your accounting software such as Xero. These reminders are great at preventing a late payment turning into nonpayment, which can cause severe cash flow issues.

At all times you should have a fair idea of how much cash your business has in the bank, how much is due to come in and how much you’ll need to pay out. 

Secondly, communicate with your suppliers and stick to frequent and on time payment terms.

If suppliers see that you pay when you say you will then more often than not they will provide favourable credit terms.

Working with cash flow forecasts can enable you to spot problems coming your way, and act now to avoid them.

Remember above all else, cash is king.