Cash is King!

Posted on December 7, 2007

One of the fundamental truths of business is that cash is king. Too many firms run so lean that they are at risk of shutdown if any large problems arise. Find out where cash goes, where it should go, and how to stay in a comfortable range.

I was surprised as I talked to the owner of a well-known, long standing firm. He was honest about the effect the economy was having on his sales, and commented that he’d reduced staff and expenses for the time being, and as a result was having to wear quite a few hats – more than he had in many years. I was impressed, and understood one important reason why his business had lasted for so many years, and will continue to do so. He stayed within his means.

An industry slump challenges many businesses. Some are in a spend-and-grow mode when the slump begins. Hoping for a quick turnaround, they keep spending. When they realize that the turnaround might not come soon, they are too low on cash, and often can’t recover in time.
One of the fundamental truths of business is that cash is king. When you have cash, you have choices and options. When you run out, the game is over.

When you spend cash on equipment or inventory, you are reducing your options. It may be both necessary and wise to do so, but look carefully at converting cash to other, less liquid forms.

Profits every month

Each month, quickly determine if you’ve made a profit. Generally, consistent profits lead to good cash flow. If you’ve lost money in a month, act quickly to stop the bleeding. Hoping for a better month next month isn’t enough. Reduce costs, or make the sales go up immediately – but don’t tolerate a loss for long.

Borrowing money is one way to get cash – and can be an effective strategy to leverage your assets and make a better return on your investment. But if you’re not both careful and profitable, debt will create an even larger hole to climb out of, and creates a debt service burden that may dog you every month.

Live within your means

It is really about business discipline – making your business live within its means. And in tough times, it often means working harder than you’d like, for less money than you deserve.

Of course a business must spend some money. But of the cash you can afford to spend, focus it on the one or two things that really drive your business. This is money well spent, and will keep the heart of your business pumping well. When the economic environment improves, you’ll be there, ready for action and growth.

Spend on what drives your business

Of course, figuring out what one or two things really drive your business is much harder than it sounds. Most business owners don’t know the answer, and instead spread their efforts and cash to all areas of their business – doing an average job at all of them, but never a stellar job in the one or two areas that really count. In downturns, below-average performers have a high failure rate; average performers sometimes make it, but are generally weak when the economic recovery arrives. Only the businesses that do an above average job in the key areas can stay strong—and often grow—in an economic downturn.

If you are one of the businesses that have seen its cash and profit position continue to slip, I encourage you to make some painful decisions now, so that next month, and each month thereafter, your company’s financial health begins to return. And if you’ve already been making the cuts and sacrifices each month, know that you are likely now ahead of much of your competition, and that the industry rebound is closer now than it was last year.

Takeaways:

• Keep enough cash on hand to run the business through a downturn or problem.
• Cut back on expenses before you run too low on cash.
• Focus your cash expenditures on the one or two areas that drive your business.