Cash isn't just "King", it's The Master!

It truly is amazing the amount of pain and discontent our companies go through as a result of lack of cash. Obviously, you must have a viable business idea and the ability to support whatever operating expenses the business will have. But beyond that, if run well, cash should NEVER be the problem if treated appropriately.



Many people have heard the saying, "Cash is King". And to a large extent, that saying is right on! But have you thought about the decisions you might make in your business if in fact, you had as much cash as you could have? Said differently, what would you do if you had no accounts receivable and everything was current? Have you considered how you would run your business differently? Have you thought about the real expenses you could reduce or not even incur? What about the opportunity cost? What about your liquid advantage?



Some of the hard costs associated are:

1. Additional headcount to collect said receivable.


2. Interest expense as a result of lines of credit being used.


3. For every 30 days an account is outstanding the company is giving away .5 to 1 full percentage point by not being able to draw interest on that cash.


4. Often times, late fees are incurred.


5. Any discounts offered by suppliers are missed.

While the above costs seem small, they can amount to 5% or more of annual sales. In many businesses that percentage accounts for half or more of the net profit of the business.

In addition to the hard costs incurred when a business lacks cash, there are opportunity costs such as the ability to negotiate better supplier/vendor bids or quotes when you guarantee quick payment. Those terms can be as high as 6 to 8% in certain economic times (such as the ones we are experencing now).

The largest expense to most businesses is labor. If in fact that is true, then doesn't it make sense that the most detrimental effect to a business is what any problem causes within the labor force? Employees will spend endless hours worried, confused, gossiping, "chatting" around the water cooler etc. (Just a side note, time people's smoke breaks and lunches if these are struggles your company is having.) Their intention is not to waste time, but to protect themselves from that which they are making worse with their actions. But this isn't a "chicken before the egg" thing. This is all fixed with cash. There will be more on employees in future entries..this is a fun and interesting topic.

So the final and most important point to make here is really quite simple. Take whatever amount of money that is owed to you by another and add it up (your total receivable balance). If all of those payments came in today, how much of an advantage would you have over your competition? If your competition has a 30-40 day recievable cycle, for 30-40 days, you'd have cash in your bank that they wouldn't. Can you say marketing? Or better yet, can you say pay bonuses so you maintain the best workforce around? These are just a couple of things that happen when you maximize what we call your LIQUID AVANTAGE.

So back to that "cash is king" thing. King doesn't really describe how or what cash is. Cash is our Master. If you respect it and treat it appropriately, it is a strict and stable control force. So next time you hear cash is king....just make the distinction that it really is much more.