Cashflow is King


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Cashflow is the most fundamental measure of business success.

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Cashflow is King

  1. 1. Cashflow is King Alan Walsh, Huntington ConsultancyNowadays with the advent of more & more powerful computer systems, business leaders seek new andexpanded ways to analyze and grasp their businesses. Systems crank out mountains of data relating to everyaspect of business operations & management. All of this data has its place, but sometimes the fundamentalstend to get lost in all the “noise”.The most fundamental aspect of measuring and operating any business is cashflow (the net of cash in lesscash out). Every business must take in more cash than it puts out, consistently, or fail. Every other measureis secondary.Cashflow is the ultimate measure of success. Your checking account can make or break you.Receivables are potential cash. Sometimes receivables aren’t collected. In such cases, all of the money youspent to create the receivablesare lost (labor & material costs, for example); along with your profit.Uncollected receivables can ruin a business rapidly, despite everything else going well. The bills still comedue whether you collect the receivables or not.Inventory is cash that’s tied up. If you’re not selling it rapidly, it’s just a consumer of cash; along with yourmaterial handling costs. Inventory has a way of losing its value quickly if you’re not moving it. Many thecompany has got itself in trouble over-buying or over-producing inventory that then sits around collectingdust and becoming “yesterday’s goods”. On the other hand, if you don’t have enough inventory on hand youmiss sales and anger your customers.Capital is cash to be worked with. Whether it’s your money or someone else’s, you don’t want that moneysitting in the business forever; unless it’s generating a lot more money. Investors expect a return – in cash.Many expect their capital back within a certain timeframe too.Debt and payables are cash or goods & services received now, for which payment must be made at a futuredate. Debts are good if they generate more cash received from net profits than the debt plus the cost of thedebt (interest& fees). In other words, you have to generate enough revenue from sales using the moneyborrowed to cover your operating & administrative expenses, the interest on the loan, and the payback ofthe debt itself; plus you want to make a profit. Debts should be taken on with careful consideration only inthose cases where they sufficiently leverage your ability to make money. Similarly, payables must pay theirway by generating more cash from sales than their cash cost.Cashflow timing is critical. At all times, you must be generating enough cash from sales (cash in) to cover allof your payment obligations (cash out). A company that otherwise looks good on paper can still find itself introuble because of timing issues. For instance, if conversion of cash from receivables falters – or too manypayment obligations fall due at one time – you can find yourself with an empty bank account and theinability to meet your obligations. Your employees, vendors, and lenders expect to be paid on time.Whether you’re running a local business, or a multinational corporation, the same rules apply.Always make sure you have a grasp of the amount and timing of your cash receipts & payments.Cashflow is King.