27.12.16 – Why Cash is Still King in Business
Running a business is similar to running a household. There are key stakeholders, mouths to feed, and relationships with other ‘families’ — all as a means to maintain life.
Cash in a business is crucial. It’s the on and off switch that fuels business growth and keeps operations running smoothly. Here are four reasons why cash is still king in business:
Managing the day-to-day
Electricity, water, Wi-Fi, plant and equipment, salaries, software, services …
Needless to say, running a business is expensive. A business owner needs to make sure the profit they’re making from selling goods and services is enough to cover these operational expenses to manage business day-to-day. The cash left over needs to be enough to carry through and manage other necessities in the business.
Businesses have dips and troughs. There will be times when operations aren’t running smoothly. In the case that a business is in a difficult time, there needs to be a repository of funds that can take care of operations for a period of time while the business finds its feet again. These funds are usually set aside just like in personal finances where people have term deposits or other investments that yield them an interest rate. Cash flow is important, as it’s the mechanism that allows a business to build up their emergency funds and also replenish it when it has been used. If there isn’t enough cash flow to put aside for risk management — how can a business finance salaries and other operations when not enough sales are going out the door?
Most businesses have ‘dream’ clients. For the visionary business owners, these clients are usually gigantic blue chips, who demand heavy resourcing from the business delivering the services. This means, there must be cash on hand that can be used to pull out the necessary resources a business needs in order to facilitate the client. Cash in this instance, is primarily used to hire more employees or freelancers who can help roll the projects out.
Aside from external client work, several internal projects may also be halted due to a lack in cash flow. In most cases, this usually includes delaying the adoption of software that might have increased business efficiency and in turn, saved the company more money. Not just software — but also delaying the hiring process, which usually means a heavier workload for the people at the company. In short, a lack of cash flow or financing means a business halts its growth and can’t expand as fast as it wants to.
Parties and other luxuries
The luxuries that have almost become a norm in businesses such as Christmas parties, Friday drinks or taxi rides don’t come free. These funds are usually excess funds a business can spare to spend and also keep up operational costs. The presence of these luxuries usually means the business is doing well and has a steady stream of cash. To drill this point in — often these events aren’t planned in advance, but are planned closer to date meaning the business needs to have cash on hand to pay for these events.
These four implications of cash in a business demonstrate the importance of cash flow in a business. Not only does cash increase the quality of life as an employee in a company, but cash can be used to increase business efficiency and pay for everyday luxuries that make employment better.
Just like running a household, cash is a non-negotiable part of business and is extremely important in order to maintain ‘the quality of life’ in the house — or, in the workplace.