Cash is king, but are you King of the cash? Posted In: Business Start-up and Growth, CFO / FD 1 Mar 2014

Cash is king, but are you King of the cash?

It has been written many times – cash is king. Simply put if you have cash in your business, without unmanageable liabilities, you can continue to run your business. Even if it is loss making – a company with a strong positive cash position can continue to trade until a brighter tomorrow.

If we think of many (if not all) of the high profile internet businesses, Twitter, Facebook, Linkedin, etc.; they all raised vast sums of capital, giving them cash to play with until they figure out how to make profits, or in digital parlance, monetize the traffic.

For most businesses, and certainly the vast majority of SME’s it is not par-for-the-course to raise millions of pounds of capital until the right profit making strategy is thought of. So what are the key areas to think about for cash management? Below are two key themes:

Budget, Forecast and Review
Analysing the numbers of your business doesn’t have to be difficult. If you are not familiar with budgeting, ask your accountant or simply look for a straight forward model on the internet. Probably in Excel, write out your full income and expenses for say, the next 12 months. If you can forecast these details for different time frames, up to, say 3 years. From your budgeted Profit and Loss account, and Balance Sheet you can extract a forecast cash flow.

When you are producing your cash flow forecast be realistic as to when you will receive payment for your invoices. Likewise think through all expenses you will incur, salaries and bonuses, rent, insurance, advertising. Don’t forget for cash flow, at some point you will need to pay the tax man.
This isn’t a one-off exercise, at least done monthly, compare your budgeted figures with actuals and review the key variance’s. Where are you over spending? Are clients taking longer to pay than anticipated?

Manage Working Capital
If cash really is king, then you must be aware of your working capital. Key components are Debtors, Creditors and Stock. Pending on the type of business you may have Work In Progress (WIP).
For debtors, how long are your clients taking to pay you? Can you offer discounts for quicker payment, demand payment in advance or perhaps Factor your invoices? For new clients, have you done sufficient credit checks to ensure they are able to pay?
Creditors; you don’t want to be become a bad payer, but there is nothing wrong with managing your suppliers expectations and having well established payment terms that you stick to. If you run your business so that you pay invoices as soon as you get them, consider setting up your accounts so that you make a payment run once or twice per month and only pay invoices that are 30 days old, or will be shortly thereafter.

Ensure you are not holding unnecessary levels of stock or WIP. High levels of stock can mean inefficient cash management, and the increased risk that your stock is out of date. Not to mention the cost of holding the stock itself.

If your WIP is high (compared to historical norms or perhaps industry standards) may be you need to review your invoicing process.

If you don’t pay your bills, creditors can commence legal procedures against your company. This can be a slippery slope to administration. Don’t get caught with your trousers down. Plan, monitor and adjust as necessary – cash is king.