The Power of MoneySeptember 01, 2011
While businesses may operate without cash or use other people’s money for brief periods of time, the old phrase “cash is king” still applies in current times and, in many ways, is even more important to the success of a business now. Not only must a business be properly capitalized but the makeup of its capital and the liquidity of its capital must be appropriate to its current and planned future operations. Too little cash restricts business opportunities and too much cash creates discontent among investors and shareholders. The right amount of cash positions a business to have the resources to take advantage of market opportunities, to take advantage of financial opportunities, and to have the best opportunity to manage and/or survive the unexpected.
Some of the advantages to having the appropriate amount of cash in the business are:
Nearly every business is presented with opportunities to improve its purchasing power or purchase goods and supplies that it needs at special prices. Whether it be clearance sales, the closing of a supplier’s location or other events, the ability to be able to take advantage of these opportunities cannot be ignored.
- Having appropriate cash reserves allows the business to solicit prompt payment discounts and additional accounts for payment on delivery. Having the appropriate cash reserves in a business will often also assist in negotiating supply contracts or financing agreements. The ability to commit to these contracts or make appropriate good faith deposits that improve terms or conditions of the agreements cannot be ignored.
On the opposite side of the equation some of the items that eat cash and leave a business in a weak position when it comes to seizing unexpected opportunities are:
Curtailment payments required by floor plan financers have become much more common in the industry and they are nothing less than a penalty resulting from poor vehicle inventory management or the dealership not being able to react quickly enough to changes in market demands for inventory product.
Factory credits not being received on a timely basis whether it be due to the financial affairs of the factory, changes in factory policies, errors in submitting the claims by a dealership or staff vacations and a multitude of other internal operation issues.
Parts inventory is a huge consumer of cash when turnover ratios, nature of the items being stocked or the improper handling of seasonal goods is not promptly and correctly dealt with.
The importance of strong credit policy occurs when it comes to granting credit and following up on collection fixed receivables is a key to cash management. Every dollar not collected means that dollar of profit is at risk.
- Not matching the asset acquired with the life expectancy or benefit period of the asset can cut into a business’s cash reserves. Long-lived assets should be supported by either permanent capital or the appropriate third-party financing. Cash should not be used to finance building improvements and other forms of expansion.
What are the warning signs for a business that indicates it is losing its “cash advantage”? Some of the warning signs include:
Shareholder managers not being able to completely withdraw from the business last year’s dividends or bonuses.
Accounts payable are being paid on a slower basis than in the previous year. There are more days in accounts payable than there has been in the past or compared to industry standards.
The business’s operating line, which historically has been used periodically on an infrequent basis, is not revolving anymore. There is an ongoing balance month-to-month.
- At the end of the month there is a search for cash. The business office is scoured for deals that have been completed but the paperwork not submitted to the financial institution, there is a review of accounts receivable to see whose cheques can be picked up, and there is a review of accounts payable to decide which bill payments can be deferred for the next ten or fifteen days.
Whether the interest rates you pay are 2% or 22%, the impact of proper management of cash and the impact of having the proper level of cash in your business cannot be ignored. Those who can manage their business and manage their cash have a bigger likelihood of success in all of their business endeavours.