If songs were written about business they would be full of verses about cash. To thrive your business needs people, service, products – but the bottom line is cash. Businesses with cash live, businesses without cash die.
Profit is important and it is why businesses exist, but it is not more important than cash. If you have cash you can run an unprofitable company for years. There are dot-com companies in business today that have never earned a cent of profit. But they’re still in business today because they have cash in the bank.
Businesses may have different kinds of cash.
Working Cash. The money used on a daily basis to run the company. The balance in this account is watched carefully every day.
Working Cash Reserves. Set aside a percentage of every day’s sales to cover large, normal expenses. Reserving cash for payroll, taxes and other costs ahead of time insures you’ll never miss a payment on the most important payables.
Rainy Day Reserves. Cash is accumulated in this account for surprise threats and opportunities – capital expenses, an acquisition, dispute settlements, etc. This cash should not be touched without approval from the CEO and other senior level staff. If possible, don’t touch it at all; try to cover these expenses from the working cash.
Hoarder Fund. An optional safety-net. When you have an unexpected windfall, take a portion of the excess cash and put it in an account with only one signer. Decline a checkbook. The idea is that if you desperately need funds they will be available, but you will have to go to the bank in person to draw them out. Make it as inconvenient as possible to access these funds.
Cash – the critical component to business success
Cash is survival – for you and your business. Unexpected expenses come up and there’s no way to predict when they’ll hit. If you have cash in the bank it will save a lot of unpleasantness and may save your business.
Cash give you choices and creates opportunities. When you have cash you can outmaneuver the competition. You can seize opportunities before anyone else and create opportunities by putting your cash to work.
Your bank can help you manage cash with tools like lockboxes and sweep accounts. They can help you pick the tools that fit your business.
Build a safety net. Secure a line of credit when you don’t need one, for the day when you do.
When cash is tight you need systems
to portion it out
- Slow down your payables. Vendors can be surprisingly understanding when you’re up-front and honest with them. Apologize and ask for temporary longer terms. Make partial payments if possible, it shows good faith.
- Create an internal expense-review committee. Most people hate committees; their slow and terrible at making decisions. That’s why you need a committee to pre-approve every expense over $100. Put your most tight-fisted staff on it and do not sign any check that has not been approved.
- Delay paying the rent. Unless you’re in a hot commercial real estate market, there’s no one more interested in your continued success than your landlord. Evictions are difficult, expensive and time-consuming. The landlord knows this, when things are tight call the landlord and be honest.
When cash is plentiful, be careful. Balance the desire to splurge on extras versus hoarding for the lean times.
Managing cash flow is critical. The way cash flows and how much you need on hand is unique for each business. Find the most paranoid, conservative cash management system you can that meets those needs.
Final thought – every morning you should know how much cash you have on hand. You should know how much you will have for the next week, have a good idea how much you will have for the next month and have a plan for how much you will have for the next year.
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