“Cash is King” is an expression that is widely used in analyzing businesses. Why is it something that you, as a business owner, need to manage? Well, without cash you could not do the things required to stay in business, for example, purchase inventory or pay your employees.
A lot of business owners only concentrate on the top line or the bottom line of their income statement and do not pay close attention to items on the balance sheet. To really manage your cash flow you need to look at the whole picture. Business owners have asked me on numerous occasions, “Why when I have huge net profits, do I not have cash in the bank?” I then look at their balance sheet and notice a few things that quickly answer that question. Their inventory and/or fixed assets have increased during the year, or they have large liabilities that they are paying down. Again, you need to look at the whole picture!
An important practice for all businesses is to make an annual budget. Another practice that is just as important should be to prepare a cash flow forecast. If a business is struggling, or is keeping a watchful eye on its finances, the business owner should be forecasting and revising cash flow on a daily basis. However, if the business is more stable, then forecasting and revising cash flow on a weekly or monthly basis is enough. To begin your cash flow forecast you need to think about how and when money is coming into the business (for example, collection of accounts receivables) and how and when money is being disbursed (for example, wages, loan payments, and credit card payments). You will be able to see when there will be cash shortfalls so you can plan accordingly.
When cash is tight, business owners don’t sleep at night and do not feel prosperous. This is not healthy for them or anyone around them. When you know what to expect, you can plan accordingly.