Cash Is Still King

We've all heard the saying, "cash is king", but do we really believe it? Lately, it seems that fewer of us are true believers, but yes it is true, cash is still king and it probably will always be that way.

I have been working with one client who has a lot of things in the hopper but no cash to make them happen. In fact, my client is at the end of his rope and barely hanging on for dear life. He probably can't pay me right now.

Another client found a great deal on a piece of real estate that houses an automotive shop. He seems to have tied it up at well below "market value" but he does not have the cash to make a sizable enough down payment that would entice a bank to finance the remainder of the purchase price.



How much cash is enough and what is the secret to getting and keeping cash? If I had the all knowing answer to these questions, I would probably win some kind of Noble prize. There are a lot of deals out there, but you can only take advantage of them if you have cash or at least a way to obtain the cash, legally.

Some of the things that can cause cash problems in your business are too few sales, too many sales, buying too much inventory, not charging enough for your products or services; and the list can go on and on.

As we manage our businesses we go through cash cycles where we have loads of cash and then almost no cash. Back and forth, from one to the other, then back again. When we have "lots of cash" we tend to let our guard down and get complacent. This is not the way to manage a business. Managing your company's cash is one of the first lessons you should learn.

But, how do we know how much cash is enough to run our business? You want to keep enough to handle any unforeseen events, but you do not want to have "excess" cash sitting idle in a bank that pays you nothing for its use.

We can figure out how much cash we need by performing a simple cash flow analysis (CFA). There are many canned, fill in the blank forms to help you create a CFA. You accounting software will probably have some kind of report that you can create a CFA from your records. Your accountant will also be able to help you.

Here is a summary of the theory of creating a CFA. First, you need to figure out how much money you have on hand and how much you need to operate the business for a certain period of time, let's say one month. You need to know your costs, both fixed and variable. Then you factor in large cash needs like, loan repayment, capital improvements, equipment purchases, and so forth. At the end of whatever time period you are working with, calculate, with the simple math of adding and subtracting, to figure out how much cash you will have "leftover" or how much you will need to get through that prescribed period of time. If you have excess cash at the end of the period, carry it forward to the next period. If you need cash to get through the first period of time, then you need to figure out how or where to get a cash injection, which will equal the negative number at the end of your calculation. Keep going for 12 months, each month carrying forward the positive or negative cash number from the prior month. This will give you a way to plan your cash needs for the whole year.

It is easier than it sounds. If you cannot do it yourself, get help from your accountant or hire a financial consultant. Having outside eyes looking in, may be a healthy exercise to go through. Either way, you need to know where you cash is at all times because, "cash is king". Good luck.