“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.