Cash is king is an old adage that stands the test of time. Without cash on hand, even the most profitable business can run into trouble.
An increase in receivables is common for any growing business, because receivables generally grow in proportion to revenue. But a mounting receivables balance also might signal cash management inefficiencies. There are many reasons why cash is critical to your success. It gives you the ability to act fast when opportunities come your way, invest in infrastructure and manage unexpected costs. A business’s cash flow is often cited as a critical factor in its potential for long-term success.
Continually reporting negative cash flows from operations can also signal danger. There’s a limit to how much money a company can get from selling off its assets, issuing new stock or taking on more debt. A red flag should go up when operating cash outflows consistently outpace operating inflows.
It can signal weaknesses, such as out-of-control growth, poor inventory management, mounting costs and weak customer demand. Those who have been in business long enough would know that poor cash management practices is the number one reason why businesses go bankrupt.
For any company to survive, cash flow is the most important financial factor. It may have enviable sales figures and profit margins, but it could still have negative cash flow if its financial operations are inefficient.
Survival during down economies
Every company is going to have periods when things are not running at full potential. For example, consider a global recession that eats into a company’s sales. Without cash on hand, that company would be forced to downsize its employee operations drastically and may even have to declare bankruptcy to pay off its fixed expenditures.
With cash, the company will be more flexible and better able to survive the downturn. Like individuals, businesses face emergencies where they need to pay expenses right away. These include legal fees and unexpected costs associated with natural disasters. Since these fees are often not built into a company’s budget, businesses must have access to the necessary cash should such situations arise? This is essentially the equivalent of an individual’s emergency fund.
Expanding in the absence of loans
Many small businesses have had to learn the hard way that lenders are becoming thriftier with how they loan money. As a result, if a company has cash available, it can better take advantage of opportunities to expand and make significant acquisitions – options that may otherwise not be available in the absence of loans.
Particularly for smaller businesses, cash can be essential for paying bills. However, note creditors only accept money, but other forms of payment can take longer to process, leading to unnecessary late fees. In those cases, paying in cash is the preferred method.
Make sure you prioritise the importance of cash. For a business, its availability is essential to not only avoid the possibility of bankruptcy but also to take advantage of various expansion and growth opportunities. If you have used a lot of your working capital, you could come up against a cash crunch that impacts your ability to pay suppliers, buy materials or pay salaries.
The time delay could create penalty payments or interest. Don’t get caught by surprise, and don’t bury your head in the sand. Keep on top of cash flow to avoid the risk of going out of business.
Managing customers, vendors and banks
Efficient market credit management is the most critical thing. Many companies fail in this effort when companies become greedy for revenue and volume over reliability and margins. You have to have a proper credit policy and a collection plan. Work with field staff closely and send out invoices to the customers in a timely manner in line with the agreed policy and practice.
Make sure your customers know when payments are due. Monitor your accounts receivables, and call and visit customers if late. Do a credit worthiness check on customers before selling to them. Offer discounts for prompt payment if it can be justified. Provide several payment options for customers so the customers can pick and choose.
With vendors, take advantage of all prompt payment discounts & negotiate for expanded credit terms. Have an inventory policy and maintain it in line with the sales forecast to avoid unnecessary cash traps. Work closely with your bankers for best facilities to have adequate comfort on fiscal management.
As the saying goes, “Cash is King.” If you have it, you can operate and grow your business in an orderly manner and take advantage of previously unforeseen opportunities. If you do not have sufficient cash, it will be a scramble, and you will have to force tradeoffs between making payroll and other priorities.
