The King And I

Cash is king... and no one except Elvis is likely to disagree. So why don’t we ever have enough and how can we fix cashflow problems without selling off part of our company?

While the years and numbers have both gone up, the need for these fundamental cashflow management skills remain the same.

Despite a natural focus on profitability, successful business owners have learnt that you can’t spend profits – you can only spend cash. Profits are important, but will your business have the working capital to make it to year end?

Even the most successful companies have problems managing their month-to-month cashflow. This particularly holds true for high-growth companies, whether as a result of launching a new product or service, winning a tender or a successful new ad campaign. While making more sales may be every business owners dream, it can quickly turn into a nightmare when a cashflow crisis occurs.

WHO'S THE KING?

Simply put, cashflow describes the shift of cash in and out of your business. Cashflow includes regular outgoings, such as salaries, the purchase of stock, rent, etc. Outgoings also include less frequent items, such as payment for purchasing a new computer, if paid from the business’ cash resources rather than financed.

Cash inflows include revenue-generating activities such as sales and interest income, but also include capital injections and the proceeds from loans.

The outstanding portion of your business’ cashflow has two sides. Firstly, your receivables, such as invoices issued to your customers but not yet paid. Secondly, there are payables, which include amounts owed by your business for the purchase of inventory, services, etc.

LONG LIVE THE KING

Cashflow is the lifeblood of your business and managing it is fundamental to sustainable long term success. Effective management of your cashflow requires regular time and care each week, rather than waiting until your creditors are harassing you before following up on those slow payers.

Your business’ cashflow cycle tracks the time taken to convert your payments for stock purchased into sales, invoices and ultimately cash. The longer the time frame, the more cash your business will require to complete a cashflow cycle.