Cash, the king of every business

Imagine your business as the human body and cash as the blood that runs through the veins, keeping all cells active and the individual ultimately alive.

Should the blood stop running for a reasonable amount of time, the cells become inactive and the human being subsequently dies.

The same applies to businesses. All over the world, the sustainability, profitability, robustness or resilience of any business of any size and status depends on how it is able to manage its cash flows. Cash flow involves managing how revenues are generated and expended.

For businesses that do it badly – mismanages their cash flows – they ultimately die hence the cliché 'cash flow is the lifeblood of business.'

Underscoring the importance of proper cash flow management to the survival and sustainability of businesses, the weekly motivational radio show on Joy FM, the Springboard, Your Virtual University, dedicated its July 12 edition to the topic: 'Financial Discipline and Cash Flow Management' aimed at educating the audience on how to properly manage their finances to ensure business growth.

It was the 10th edition of the entrepreneurship and business growth series, which has been running for the past two months.

The Managing Director of IFS Financial Services Limited, Mr Kojo Ohene-Kyei, took the through the importance of cash flow management and done and how businesses could capitalise on it to grow.

Importance of cash flow management

Mr Ohene-Kyei explained that although it was often ideal to transact business on cash basis only, challenges in the economy had made that impossible.

Increased competition and other difficulties, he said had caused most transactions to be done on credit basis, swaps and barter, among others.

This, he said called for a disciplined cash management mechanism by entrepreneurs that would ensure that the business in question had money ready to keep it running.

"Careful cash flow management allows the entity or person to estimate the amount of cash it will have at a given time, and project inflows and outflows in order to deal with potential shortfalls.”

“So, if cash flow is actively managed, it helps in dealing with potential shortfalsl," he said, referring to the lag that can occur when a company is supposed to pay its suppliers and the period it receives its own revenues.

"There's always a gap there and the question is; how do you manage that gap? Now, how you manage that gap is very key for the business. This is because, if it is not properly done, it is possible that the company will fail in some commitments and that can affect its reputation in the market place. In extreme cases, it can even lead to bankruptcy.

Symptoms of cash flow mismanagement

Explaining further on the importance of cash flow to the survival of a business, Mr Ohene-Kyei said although a business might be profitable, lack of proper cash flow management could cause to run into bankruptcy, resulting in a collapse.

"The reality is sales is vanity, profit is sanity and cash is king. If you sell and you are not getting anything (selling on credit), it is vanity. Profit just shows that your business is okay but cash is really king.”

“So, you can be making all the profits in the world but if you cannot meet your commitments as they fall due, you will be in trouble," he said on the show hosted by Rev Albert Ocran.

On the symptoms of businesses that have cash flow mismanagement issues, the MD of IFS Financial Services mentioned the inability of a company to meet payments that were due as the foremost.

"For such a company, payments that are due would not be met. So, if they have given, say, a supplier post-date cheque, the cheque will go to the bak and bounce (no sufficient money in the company's account). They will have orders they can't deliver on and sometimes they can't even pay employees on time. All of these will be signals that the company is suffering from a cash flow deficit," Mr Ohene-Kyei said.

To avoid getting into that position, he said businesses needed to pay proper attention to cash flow management, which involves diligent planning to forestall being overtaken by circumstances.

He bemoaned the situation where entrepreneurs prided themselves in opening many branches and/or businesses only to satisfy their egos while milking the parent company of the needed finances.

"Whenever you decide to embark on any expansion, you really have to undertake a value analysis on what is going into the capital expenditure in putting the new branches or businesses up, what will be coming in and what are the resources available to start those new ventures. If these are not done, it is likely that the new venture will run into trouble," he said.

Stressing the importance of cash to the survival of a business, Mr Ohene-Kyei said in actual sense sales are not real until money is received.

As a result, he said it was important for the head of the organisation to have a daily update of the cash position of tanhe organisation.

"I know the cash position of my company on daily basis and I think it is something that CEOs must do. With that you keep track of what is going on and it keeps you in check," he said.