Show me the Money!

Why Cash is King in every business and how to maximize it now.

Cash is king in every business. Are you maximizing your business value through cash management?

Cash is the lifeblood of every business. Cash is the blood that makes the body work. Cash is used to pay your employees, pay your vendors, keep the lights on, and ultimately keep the business operating.

If you were lucky enough to benefit from the PPP or EIDL loans from the SBA, don’t be fooled by your current cash balance. Those loans have lulled many business owners into a sense of complacency. Because of these loan programs, some businesses have more cash on their balance sheet than they have ever seen. That doesn’t mean that you can take a break from managing the cash.

In times like these, and indeed in all times, closely managing cash may be the single most important factor in running a successful business and maximizing business value. Many small businesses manage by the checkbook. While that method works in the short term - there’s much more to it than just checking your balance at the end of the month.

Well-run businesses measure cash very closely. In my businesses, cash was the first number I saw at the start of my day. Our CFO would tell me daily the cash in the bank, along with our receivables and payables balances. Did I really need those numbers every morning? Probably not - weekly may have been fine, but it helped me drive a culture that understood that cash is king. Cash management was and continues to be my daily blood pressure check - the numbers tell me if I need to just pop a pill, call the doc, or head to the emergency room with the paddles charging.

Here are 5 things business owners should take a look at to manage cash effectively.

Despite the cash infusion from the federal government in the form of various loan programs, it’s clear that the credit market is already tightening. We’ve heard just this week that some banks are asking for a 12-month cash projection in order to renew lines of credit in the future. Really? A 12-month cash forecast may be impossible in the midst of what we’re facing now with a global pandemic

Cash forecasting is important.

Cash forecasting gives you the ability to see problems long before they appear on your doorstep. Cash forecasting is a flexible model built on expected inflows (receipts and deposits) against outflows (payables, loan payments, payroll, rent, etc). Realistically, however, many small businesses do not actually do cash forecasting, and producing one may appear to be a monumental task to create from scratch. If you need a cash forecasting tool - just reach out and we’ll send you a foundational template that will help you predict your cash flow. No strings attached.

If you already have a line of credit (LOC) in place, we’ve been advising our clients from the early onset of COVID in the US to draw down their lines as much as possible. This ensures that cash is available. If you have not drawn your line, to the extent that you can, you should do so right away. Bear in mind that most LOCs require some form of borrowing base (the amount you can borrow against things like accounts receivable and inventory), so don’t break your bank covenants when you draw down the line, but borrow as much as you can.

You should also maintain an open dialog with your banker. Let them know what you’re doing, and keep them apprised of your financial situation. Most LOCs can be called (due and payable) by the bank if they have reason to believe that the borrower does not have the ability to pay back the loan. Maintaining that open dialog with your bank will help keep the relationship strong. After all - banks WANT to loan money. That’s how they make money -- on the fees and interest. But, they will never loan money if they don’t believe it will be repaid.

Beyond the line of credit - there are other places to look to improve your cash position - chiefly in three main categories: Accounts Receivable, Accounts Payable, and Inventory.

Accounts Receivable - This is not the time to be timid about your cash collection efforts.

Most small businesses shy away from enforcing collection policies and procedures. Perhaps they are afraid to lose a customer or they think it appears too confrontational. You provided goods or services in good faith, after all, and you should be paid for your work. This is not the time to be timid about your cash collection efforts.