Cash is King

You might have heard or come across the phrase ‘Cash is King’. Have you ever given thought to what it means, particularly in relation to your business? The primary goals for all business ventures are to be financially successful, and to do that you need regular profitability, or should we say cash. Thus, ‘Cash is King’, especially in business.

Is cash really king? 

Cash is the lifeline, or heart of your business, hence the accuracy of the phrase ‘Cash is King’. Success in business is measured through the growth of your profit, or whether you are experiencing a decline. Cash is required for any business to function effectively; you need to invest in your company through wages, hiring staff, advertising and management, and much more.

You cannot have employees without cash. Therefore your business cannot expand naturally. To experience the fruits of success, you need to have a healthy ‘cash flow’. Realistically you cannot do very much without cash, or a ‘cash flow’ to run your company effectively, or you may be able to but not for very long. Look at this way, cash equals profit, and profit means that you are ‘successful’.

Cash flow vs. profit 

Your company’s cash flow and profit are two separate aspects of your business, so which one is more important. The short answer both are equally important. If you want your company to thrive, it is important that you accurately record and track both.

Cash flow: Merely the cash that flows in and out of your company, much like the blood flow to the heart. Cash flow refers to your business operations, from financing to investing, you need a cash flow to meet your current, quarterly or annual financial obligations.

Profit: Your business accountant may refer to this as your ‘net income’ or ‘net profit’. It is essentially the balance that remains once your business expenses are deducted. There may be times that you have made little or no profit, but it doesn’t mean that your company isn’t a success. If you are a start-up business, for example, you profit may not be visible on your first financial report.

The golden rule is as long as you have a healthy cash flow through the success of your product or service then your profit naturally starts to grow.

How to improve your cash flow

To improve your cash flow, you first have to understand the importance of invoicing your clients, or distributors. Having a clearer understanding of the quoting and terms of the service or product that you are offering, will provide your customers with confidence. If your customers feel confident and secure through your product, invoicing process and your general terms, they are more likely to return. This will generate a healthy cash flow through repeat business.

The next tip is through monitoring and accurately recording how, where and when your cash flow is being used and if you can cut some costs. If you have an awareness of your gross profit, you can precisely monitor any price increases from your manufacturers or any third party companies.

We have mentioned that cash is a crucial requirement for a company to function. However, not everything costs money. What we mean, you can find some helpful free resources are designed to help new business ventures, or SMEs to manage their expenses and revenue effectively. These resources can be more insightful and accurate than using a standard spreadsheet.

This article aimed to illustrate the importance of cash in your business. Remember it is the lifeline, and having a system in place that works, will ensure that your cash flow remains healthy. Keep accurate records, chase up overdue invoices, then you will understand why ‘Cash is King’.

About the author: 

Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.

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