Certified Management Consultants

Everyone in business knows that Cash is King but not everyone understands why this is the single most important factor that businesses Succeed or Fail. This is especially evident for companies in a growth stage as business owners and corporate companies treat “Cash Flow” differently. Usually business owners who have built their businesses from the ground up or have taken over a family business that has been in existence for many generations have a different view and appreciation of cash flow.

For instance a CEO or CFO in a corporate company who may not be a shareholder but has been appointed by the board of directors with a predetermined mandate to grow the business may have been appointed because of his/her industry experience and/or credentials or successful career path and successes in previous corporations.

In this instance the company may be financed by a private equity company or funds raised by venture capitalists whose sole mandate is to obtain a high return on their investments.

Alternatively a business owner may have entered the business as a family member or a succession plan to continue the business and to continue to grow the business organically who may or may not have the industry experience or skill set to take a leadership role to drive growth. Sometimes these private business owners hire an outside professional CFO to manage the business to grow the business.

The family business may have once been a “cash cow” because the parents or grand-parents understood the business from the grass roots and knew how to obtain high margins and the experience to build lifetime relationships with their customers and vendors which all contributed to a healthy cash flow.

Family owned businesses have a different culture and historically many of these established businesses have very loyal employees and many have worked in the same company for most of their careers. There is a subtle difference in growing a family owned business compared to growing a corporate owned business as there are a host of dynamics from culture to management style which can impact the growth of the company or even affect the cash flow either positively or negatively depending on the leadership roles and their mandate.

Therefore there are many factors that management need to pay close attention to continue being successful or growing the business and the most important factor is cash flow, however, it always comes down to four key success areas Strategy, Operational efficiency, Financial effectiveness and Real time Data reporting.

1. Cash Flow
For any company to survive, cash flow is the single most important financial factor. A company could have sustainable revenue, comparable expenses, and significant income, but if its financial operations are not designed efficiently, it could still find itself having cash flow issues.

Without positive cash flow, any company, no matter how promising the business model, will go bankrupt. If a business has just been successfully launched, it may be able to survive on negative cash flow in the short-term in hopes of achieving long-term success. If adequate cash flow forecasting and planning is not implemented, companies will find it challenging especially if the industry or market becomes more competitive. Adequate budgeting and planning will help these companies to remain in business and to prosper.

2. Capital Investments

Without cash flow a company may never be able to experience substantial company growth that can produce sustainable revenue and increase profitability.Securing financing through loans is not always a viable option to grow the business as it is expensive to pay high interest rates that will further burden the company’s cash flow and bottom line.

A company requires significant funds to make investments in infrastructure, hiring the right skilled employees and to expand its sales team and invest in marketing costs to expand the market to increase revenue.

3. Company Acquisition
Companies can expand by acquiring other companies to obtain a bigger piece of the market. All of these acquisitions require investment capital. Without the necessary cash, these companies would never have been able to capitalize when an opportunity arises to buy a valuable company at a bargain price. It is acquisitions like these that do wonders for any company’s growth potential but management needs to be cautioned not to over extend itself financially by risking its working capital.

4. Working capital
All companies need to provide for a potential slump in the sales numbers for many reasons and need to prepare for an emergency fund to tide itself over through these periods when the business is not running at full potential. Always look at the worst case scenario in the event of seasonality trends or even a recession. Without adequate cash on hand, that company would be forced to drastically downsize its employee operations and may even have to declare bankruptcy With cash, the company will be in a stronger position to survive these difficult periods and focus on areas that will allow them to stay competitive and in business.

“Cash is king”

because it encompasses all areas of the organisation which can be

the company’s lifeline to success or failure