Is Cash Really “King” in Small Business? By Salim Omar, CPA At Isnare.com Ezine Articles

Although cash is critical, most small business owners put emphasis on profits instead of cash flow. The dot-com bust is a painful reminder that profitability does matter – but that “cash is king”. I’ll even go one step further – managing cash flow is THE most important financial measure in any business. Knowing how much cash is coming in versus the amount required to go out, not only helps you understand what amount can be re-invested into the business, but can also determine whether a company will survive.

Not all cash coming into a business must come from operations. Investments, both debt and equity, can provide intermediate cash to run a business. However, it is critical to know in advance what your cash needs will be to find the best source of funds. Sitting down each quarter or at least on an annual basis to review these concepts is important for generating cash flow for your business.

When you imagine a new business, you think of what it would cost to make the product/service, what you could sell the product/service for, and what the profits might be. We are trained to think of a business as sales minus costs and expenses, which are profits. Unfortunately, we don’t spend the profits in a business; we spend cash. In fact, many businesses discover that they have little cash flow at the end of the year even though their profit and loss statement shows a decent net profit.

Profitable companies go broke when they have all their money tied up in assets and can’t pay their expenses. Working capital is critical to the health of your business. Unfortunately, we don’t see the cash implications as clearly as we should, which is one of the best reasons for proper cash planning. Businesses have to manage cash, as well as profits to be successful both in the short term and in the long term.

Cash flow and profit are two concepts that are very different from each other and very often misunderstood by many business owners. Hence, adequate attention is not given to cash flow and cash reserves. A company should make all efforts to have enough of a cash reserve to pay bills, salaries and other expenses for several months (or longer, ideally) during cash-flow fluctuations.

You should create a program that will enable your business to build cash reserves which include the amount needed. The program should show how to build it and where to invest it so that it works as hard for you as you did to build it. My rule of thumb and advice to my small business clients is to maintain between 4 to 6 months of a cash reserve at all times. These cash reserves will then be available in the event of a cash crunch or an opportunity that arises.

Business opportunities arise on a daily basis that cannot be taken advantage of due to poor cash flow and lack of a cash reserve. For example, if your business runs on commodities such as sugar for production of products, prices for this commodity fluctuate throughout the year. If the price of sugar dropped substantially, offering your business the opportunity to boost net profits by lowering operating costs, this would be a prime opportunity to take advantage of. But, if your business does not have the cash flow to take advantage of this opportunity, it will miss out on this chance to boost profits.

Cash is king. Simply put “no cash equals no business.” Tracking the amount of cash in your small business is a vital function that you can never lose a handle on.

Published At: Isnare Free Articles Directory http://www.isnare.com
Permanent Link: http://www.isnare.com/?aid=337939&ca=Business

Important Notice DISCLAIMER: All information, content, and data in this article are sole opinions and/or findings of the individual user or organization that registered and submitted this article at Isnare.com without any fee. The article is strictly for educational or entertainment purposes only and should not be used in any way, implemented or applied without consultation from a professional. We at Isnare.com do not, in anyway, contribute or include our own findings, facts and opinions in any articles presented in this site. Publishing this article does not constitute Isnare.com's support or sponsorship for this article. Isnare.com is an article publishing service. Please read our Terms of Service for more information.