At the top of every business owners’ priority list should be the accumulation and preservation of cash. When cash is a top priority it acts as a safety net for unexpected events, provides additional options for business decisions that may not otherwise be available, and the best incentive is the peace of mind it gives to the business owner. Below are four basic rules of cash that every owner should strive to keep.
- Create Cash- The best way to create cash is to maintain positive profit margins. I have seen companies with positive profit margins have an inadequate amount of cash due to other inefficiencies such as, not being able to collect receivables; however, I have never been involved with a business that created cash over the long term with net margin losses. Cash is a lagging indicator of a profitable business.
- Increase Cash- Once a company creates cash with adequate profit margins, it must then increase it. Increasing cash means collecting receivables timely, maintaining lean inventories, and managing payables wisely. It is called managing the cash gap and businesses that will do this well, will build cash.
- Conserve Cash- Once cash is created and increasing, a portion must be preserved for unexpected emergencies. A good safety net is to always have two to three months of cash stashed in a conservative account that is never touched.
- Maintain Cash- Cash is maintained by giving it the attention it deserves. Giving cash attention involves measuring and continually forecasting cash flow three-twelve months in advance and updating the forecast continually. Forecasting cash enables company management to look down the road and make wiser cash decisions early.
No one can predict the future and how the economy may turn. However, by creating, increasing, conserving, and maintaining cash, a business will be much more prepared for the conditions that may lie ahead.