The expression “cash is king” has been around for years. Now, more than ever, as times are more difficult for business, business operators must ensure that they protect this critical asset of their business structure.
No doubt you have heard the comment “It was a great business but they did not have the cash to run it properly”.
There is almost no transaction in business that will not add to or take from the business cash reserves. The most common problem that uses up a business’s cash reserves is debtors. The business must pay for the goods or wages to make something to sell, but that cash is not replaced quickly, as the debtor may not pay the debt when expected.
Prior to the GFC, it was possible to call your bank and obtain short term finance to cover the problem of a debtor not paying on time. This is no longer the case for many businesses. Banks see businesses that are caught short of cash as “poorly run” and potentially a credit risk. Whilst banks still like to see their loans secured, it is the cash flow back to the business to repay that debt that interests them more.
The method of avoiding this sort of problem is calculating the business requirement for assistance and ensuring that that assistance is available when required. Cash flow budgets allow the business to see its cash deficiencies early and approach lenders early so that either funding can be put in place or the business activity stopped prior to making the deficiency.
As with most business issues, it is planning that is vital to ensure not only success, but survival too. Cash flow budgeting is a crucial form of planning that every business needs to put into practice. Cash is king simply because it can make or break a business.