Why CASH is important in companies, CASH is King
The phrase “cash is king” refers to the importance of cash-flow in business management.
There are many factors that might contribute to a company’s failure, but one that never goes away and affects every project is a lack of funds to pay for the many bills.
As a result, generating sufficient revenue is a requirement of any business venture.
On the long run, we focus on profit, but on the short run, cash is king.
We may be able to sustain a loss over a short period of time, perhaps even a whole year of losses. What we really need is something effective that will allow us to face our tasks without feeling tense.
Having no cash tensions allows us to make better management decisions.
When there are no cash issues, it is easier to make decisions on the account of results.
The financial year net income is the objective, but to achieve it it is necessary to overcome the difficulties that appear along the way.
Business management theory tells us that the ideal is to ensure that the invoices for our sales occur before the payments for purchases.
That is, that we pay our suppliers when we have already get paid from our customers.
But in the real world that happens rarely (hypermarkets, online commerce…).
When it is not possible to advance the collections to the payments, it is necessary to have a surplus of treasury to be able to attend to this gap.
If we do not have this remainder, we may be in breach of our payment obligations.
And the market (suppliers) does not easily forgive such non-compliance.
If we have cash available for the normal operating cycle of the business, we can focus on the margin.
If we’re short on cash, we’ll probably have to accept margin reductions in order to generate it.
And those margin reductions will sometimes lead to loss-making trades.
We can bear trading losses for a short time, but not for a long time.
If, in addition, this lack of cash coincides with a slowdown in our market (sector or economy), it will be accompanied by a reduction in sales that will further reduce our generation of cash.
The way to overcome this transitory difficulty will be through a reduction of the margin in exchange for a faster collection of payments.
Therefore, in the short term we can accept a loss.
The problem appears when it becomes chronic and we cannot generate cash fast enough for the demands of our company.
It is necessary to establish a business management control that detects variations in the generation of cash, in this way the appropriate decisions can be made quickly.
It is necessary to establish a business management control that is capable of forecasting cash-flows in order to anticipate the situation and act accordingly.
And those control systems go through the study of cash-flows, because as we have seen “cash is king”.
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