Cash is needed to run a business. Cash allows you to pay bills, meet payroll, and make capital improvements to fuel expansion. Cash, however, runs out quickly and must be replenished through a steady cash flow for the business to survive, even in the most prosperous of times. In the new economy, poor cash flow kills businesses.

Cash vs. Cash Flow vs. Profit:

The common experience of getting ready to wash your face provides a simple analogy for these complicated and intertwined financial metrics. Both the faucet and the drain represent a cash flow that can be defined as flow in (faucet) and flow out (drain). The water that is poured down the sink is analogous to the revenue that enters the business. For cash inflow, it doesn’t matter if the product/service was sold at a profit or a loss, just that the income is flowing. Rather, all business expenses, from the electric bill to insurance, payroll, and provider charges, are represented down the drain. Just as the water comes out of the sink, the company comes out of cash. The water that accumulates in the sink represents the available cash. Finally, increases (gain) or decreases (loss) in the amount of water in the sink, from one measurable time to another, represent the company’s profit.

So, for example, a business might measure profitability on a monthly, quarterly, and/or annual basis, which means it’s comparing revenue inflows minus expense outflows to determine which was greater over the period. If the income was higher, the company was profitable. If the outputs were higher, the company was operating at a loss.

Every measure of financial achievement is necessary. Additionally, increasing each measure is essential for continued operations and growth.

cash king:

King Cash rules the kingdom. The bigger his company’s cash pile, the better he’ll be able to sleep at night. While savings don’t solve problems, they do give you something that would otherwise be unattainable: time. If the company is operating in the red (not profitable) or cash outflows are greater than inflows (negative cash flow), the cash on hand buys him the time he desperately needs to correct these problems. Both will need to be corrected to survive; the cash buys you time to figure out how to turn it around. Ironically, by definition, the cash your company has now came from positive cash flows and profitability at some earlier point in the company’s history. It is carefully collected each year in the retained earnings line of your balance sheet and stored in your savings account.

In the absence of real cash on hand, the company must resort to debt in hard times. Unfortunately, banks and lenders are slow to lend cash to troubled businesses. So if your business is in crisis and you didn’t execute a financial disaster preparedness plan when times were better; there is little you can do other than liquidate the assets. If, on the other hand, all three metrics are high, now is the time to request or increase the company’s line of credit. This is best done with a recently signed large contract and the latest expertly printed and bound financial statements.

queen cash flow:

King Cash rules the kingdom as its head of state; but Queen Cash Flow is the neck of him. And everyone knows that the neck turns the head. So, assuming your company isn’t cash rich, the metric that rises above the others in demand of your attention is cash flow.

Imagine a situation where the company is profitable on paper, meaning that it is selling its goods/services for more than the cost of delivering them; but, the cash is not flowing. This would mean that the income is due as Accounts Receivable; Still, he hasn’t reached the firm’s door. How long can a company survive? Assuming that the company does not have cash on hand or the means to acquire a quick and temporary infusion of cash (line of credit), the question can be answered with another: how long will you and your co-workers continue to work for a company after a payment date has come and gone without payment? Suffice it to say that the demise of the company is measured in weeks, not months or years.

prince’s benefit:

Companies are in business to make a profit, period. Without profit, there is no growth, and corporate value declines as assets age and depreciate. Earnings, like the Crown Prince, must be treated with respect to prepare for the future. Winnings can be bypassed in extreme situations to satisfy King Cash and Queen Cash Flow. However, if this is done for more than brief periods of time, the future of the company is in jeopardy.

Financial metrics are company royalty. Each must be cared for and cultivated. As cash flows increase, cash on hand and profit also increase over time. Although economic times can be desperate, the rules of corporate finance never change. As complicated as these topics may seem, they can be summed up in a very simple principle that you probably learned growing up: “if mom ain’t happy, nobody’s happy.” Take care of your cash flow and that positive cash flow will take care of everything else.