Cash Is King

Cash Is King

A statement recently caught my attention: “Revenue is vanity, profit is sanity and cash is king”. This rings true for most South African businesses and even more so these days as we enter economic conditions with zero GDP growth predicted by the Reserve Bank of South Africa.

Any business requires cash to run its day-to-day operations, but also for expansion and growth. The cash flow for any business is much like the blood flow in the human body. Blood flow is a continuous cycle and we cannot survive without it. The same goes for cash flow in any business: money is constantly coming into the business through sales or service provision, and leaving the business when payments are made to suppliers and salaries are paid to employees. The business requires cash to survive and ultimately thrive.

Organisations go out of business not because they don’t have a good product and service, but because they don’t have money to sustain the business. Consider this scenario: the business receives a larger than usual contract for work, but does not have the cash to buy the raw material to deliver this large and important order. The outcome is a lost opportunity as the business cannot deliver on the large order. Or the business does have the cash to buy the raw material for this large order, but not enough cash to pay salaries. Very few employees will continue to work if they don’t receive their salary at the end of the month. This places strain on the business, as the potential is there to grow and generate revenue, but not the cash flow to support this growth.

Managing cash flow starts with a better understanding of what is driving cash flow for the business. The easiest form of income is money coming in from sales of products or services rendered. Don’t make the mistake of thinking that all money from sales will stay in the business. This is where the saying “Revenue is vanity, profit is sanity” comes into play. From all the sales generated, the business now has to pay for the operating expenses as well as for the products received from the suppliers.

Managing cash flow in the business and the working capital cycle go hand in hand. Working capital focuses on three key areas namely Accounts Receivable (money outstanding from clients), Inventory, and Accounts Payable (money still owed to suppliers).

From a revenue generation perspective, any business wants to sell as many of its products at the right price for the quality offered, and in this way winning over customers that keep on returning. If the sales are on credit, then collection of outstanding amounts according to the terms and conditions of the credit agreement is critical. In these trying economic times all businesses should keep an eye on their debtor’s book and ensure that they recover the outstanding balance each month, as it is possible that some of their defaulting debtors may close their own doors.

The second key part of the working capital cycle is having the right inventory on hand. A clear understanding of what your customers want is required for business success. Having inventory on hand which is not moving constitutes money that is tied up and not working for the business. This is like having a pile of cash on the store floor or in the warehouse just lying there gathering dust. In the same way, no well-managed business will have a pile of cash neatly standing on its shelves or showroom floor. Yet so many businesses have inventory standing on the floor or in the warehouse that is not selling. This is poor use of money. This inventory should be sold even at a discount if it means freeing up the money to buy other inventory that would meet customer requirements.

Lastly, businesses should focus on the suppliers. Payments to suppliers are part of the working capital cycle, and businesses should identify opportunities to create partnerships with their suppliers that would benefit both parties. An example would be to negotiate a discount for early settlement of invoice or longer payment terms, which will assist the business with cash flow management. Whatever is agreed upon between the parties should be to the benefit of both businesses, otherwise the arrangement will not be sustainable, with one of the organisations running the risk of going out of business owing to lack of cash.

The cash flow management of the organisation is often left to the CFO and CEO and is a headache to manage in isolation. It is vital that each employee should also understand the importance of cash in the business and the role he or she plays to secure it. Employees don’t have to understand the entire cycle but must appreciate the importance of having money in the business and how it is used to keep the business sustainable. Manage rs should share with employees what they can do to improve the cash flow management, such as focusing on cash sales, increasing sales volumes, or managing inventory and ordering the right volumes for the business. Employees also maintain the relationship with suppliers, so they should understand the impact of payment terms and maximising these to the benefit of the organisation.

Any business must have money to make money. If investors have deep pockets, cash flow may not be a problem. If, however, the business is reliant on borrowing from financial institutions for managing the working capital of the business, then the focus should not only be on revenue and profits but more so on cash.

Revenue is vanity, profit is sanity and cash is king!

AUTHOR:

Sulet Van Niekerk: A faculty member at USB-ED, external facilitator, business coach and consultant.

SOURCE:      http://www.leader.co.za/

IMAGE CREDITS:     http://www.growyourbusinessgroup.com/

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