“Cash is King” is an old expression in business. But I largely ignore cash. Sure I check in on it at the end of the month but on a day to day basis nothing could be further from my mind (for most clients). And that’s a good thing.
Cash is the end result of all the other business processes. Therefore, it’s not something that can be managed. When a business has cash problems, that typically doesn’t stem from a problem in the cash accounts. Rather cash problems are the result of breakdowns elsewhere in the business. If you’re reacting to a problem due to declines in the cash account, you’re reacting far too late in the process. Something has probably gone wrong months earlier. That’s because for most businesses, cash is a lagging indicator. A business can go through a period of losses and be building cash as it collects prior period receivables. I’ve seen this happen more than once.
Unexpected declines in cash are usually the symptom of the following underlying issues.
- The balance sheet is bloated. Typically inventory and receivable levels are higher than normal. Why? Are customers not paying timely? That could be the result of industry trends or quality problems. Currently, many companies are running with higher inventory levels as supply chains still aren’t as stable as they were several years ago. Having processes in place to manage these factors is far more effective than watching the cash accounts.
- Some companies are focused on growth but don’t actually plan for it. Growth typically consumes cash as you open new locations, expand into new product lines, or increase capacity. These are all good things if carefully planned, but if not they can create cash stress on the business.
- An inadequate capital structure can also create stress. I have seen business owners suck every last nickel out of the business leaving the company cash starved. It’s an incredibly inefficient way to run a business as employees scramble to pay bills and lack the necessary resources to invest in long term improvements. An appropriate capital structure includes a well reasoned distribution strategy.
- Losses obviously cause cash stress but as mentioned above, there can be a timing difference between the period of the losses and the declines in cash. Look at the income statement first. If you’re one of those business owners who logs into the bank regularly to see how much cash you have, you should be looking elsewhere.
If a company is well run (which almost always implies profitability) and well capitalized, I only glance at cash at month end to make sure they are in line with expectations (of course, the accounting team is watching more closely and completing bank reconciliations).
If you’re watching cash like a hawk, there’s a better way.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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your cash is flowing. know where.®
Ken Homza
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