The Lifeblood of Your Business

The Unforgettable Class. In 1978, my second year of college, I walked into my introductory finance class and had one of the most memorable experiences of my career. About 75 students sat down as the professor sat on a stool in front of the class. Once all students were assembled, he got up, turned around, and walked back to the large green chalkboard (remember those?) that ran the width of the classroom. He took a piece of chalk and wrote in four humongous letters across the front of the room - C A S H. The letters spanned the entire width of the classroom. Then he sat back down on the stool and didn’t say a word. He just stared at us. We all sat there for 50 minutes, uncomfortably mumbling to each other things like, “What the hell is going on?”

After what seemed like the longest time, the bell rang and we all filed out, on to our next classes, trying to understand what we had just experienced. Two days later, we came back to the same classroom and the professor asked, “What is the single-most important thing in business?” Of course, it hit us like a ton of bricks. And in my career, hardly a day goes by that I am not again reminded that cash is indeed the most important element of business.

Cash Is Vital. For the following:

·      Operational Liquidity: Cash ensures your business can meet its immediate obligations, such as paying employees, suppliers, and other operational expenses. Without adequate cash, even profitable companies can face operational disruptions or failure.

·      Financial flexibility: A healthy cash position provides businesses with the flexibility to seize opportunities, whether it's taking advantage of bulk purchase discounts, investing in new equipment, or expanding into new markets.

·      Risk management: Cash reserves act as a buffer against unexpected events or economic downturns. This financial cushion can help businesses weather storms that might otherwise force them to close their doors.

·      Credibility and relationships: Strong cash management enhances a company's credibility with stakeholders, including investors, lenders, and suppliers. It can lead to better terms in negotiations and increased trust in business relationships.

·      Cash measures success or failure: If your business is working, it will generate cash. If it’s failing, it will consume cash. It’s simple and it's binary.

Manage Your Cash. To harness the power of cash, you’ll need to implement effective cash management strategies:

·      Forecast cash flows: Accurate forecasting allows you to anticipate cash needs and surpluses, enabling proactive financial planning. This involves analyzing historical data and market trends and making future projections to create realistic cash flow models.

·      Optimize working capital: Managing accounts receivable, accounts payable, and inventory levels efficiently can significantly improve cash flow. This might involve negotiating better payment terms with suppliers, implementing stricter collection policies, or optimizing inventory turnover.

·      Manage cash reserves: Building and maintaining adequate cash reserves is crucial for financial stability. These reserves provide a safety net for unexpected expenses or revenue shortfalls, ensuring business continuity during challenging times.

·      Use technology: Leveraging cash management software and digital tools can streamline processes, provide real-time visibility into cash positions, and facilitate more informed decision-making.

·      Regularly review and adjust: Cash management is not a set-it-and-forget-it task. Regular reviews and adjustments of cash management strategies ensure they remain aligned with business goals and market conditions.

Know Financial Accounting. This is the second class I advise everyone considering a business career to take (the first being microeconomics). And, frankly, a lot of existing businesspeople would benefit from it if they never took it before. 

Financial accounting has a lot of purposes, but I have always felt one of its most important is how it tracks cash. Sure, you have your cash account that actually tracks your cash balance. But it does not tell you where you are making cash and where you are losing cash. This is what the bookkeeping part of financial accounting will tell you. And knowing the answers to those two questions is paramount to effectively running your business profitably.

GROW and SELL Advisors, wholly-owned by Traversi & Co., LLC, is a premier sell-side M&A advisory firm – a boutique investment bank – serving the lower middle market.  Visit us here.

For a short video clip on this topic, click here.