This article is part of the newsletter OpenBooks crafted by LiquidCFO and was originally posted in Substack. You can access the original content here.
Cash is king.
No surprise that cash management is also called treasury. A business with no profits but with cash in the bank should be fine – but a business with profit and no cash in the bank is in big trouble.
Cash management is the most relevant aspect that any business owner needs to master. Cash is what keeps your business running, and you should focus all your energy on getting reliable frameworks to forecast different scenarios and simulate your cash position to avoid surprises. A negative surprise could mean bankruptcy in a blink of eyes.
Let me give you 5 basic concepts you need to know about cash management:
- You will only know that you are running out of cash when you no longer have cash left in the bank.
Every business owner wants to know what are the early signs that you will be running out of cash. Unfortunately, there will never be any early signs of disaster when it comes to cash flow. The truth is, by the time you detect a problem, it’s already too late. This is why it’s so important to implement forecasting processes with your finances to ensure proper monitoring and tracking of your cash.
- The fastest way to grow your cash position is by increasing the price.
A price increase is a much more straightforward strategy than trying to sell more. Your customer is already there, and if the service/product you are offering is highly valuable to the client base, the risk of churn should be lower – as long as it is properly communicated. Acquiring more customers is always a dangerous route to go when it comes to cash needs.
- The way you charge your customers determines who finances who.
I’ll exemplify this with 3 scenarios:
Scenario A: You charge 100% upfront: your client finances your business
Scenario B: You charge 50% upfront and 50% upon completion: your client finances you to get the work done
Scenario C: You charge 100% upon completion: you are financing your client
Obviously, everyone wants to be in Scenario A. But it can be complicated: you may be acquiring a large customer that will eventually cover for the short term cash needs, and you will end up subjecting yourself to Scenario C. But as much as you can you want to be in the Scenario A or at least Scenario B. Value your business and your clients will do the same.
- You need to know your cash conversion cycle
This is a powerful and underrated metric every business owner should have on top of their mind. It shows you how long it takes to convert into cash (not revenue!!!) the investment you made on buying resources, paying suppliers etc. in order to get your product or service ready to be sold. It basically shows in how many days the cash outflow comes back in.
- Profitability and cash flow are completely different concepts
A profitable business means that the service or the product you are selling is viable. You are able to sell your product at a price that covers all the costs and expenses associated with it, and therefore gives you profit margin.
Cash flow negative means that you are not originating cash now. That could be driven by investments in growth (expenditures in marketing, sales, increasing operational capacity, etc.) or by poor management of accounts receivable (giving your clients longer payment periods compared to how fast you pay your suppliers). This is solvable with the management of your cash conversion cycle.
On the other hand, unprofitability issues are not as easily solvable since your clients may not willing to pay the price that would make your business viable, nor your suppliers to provide the goods and services by the costs that you need them to.
Cash is the oxygen of any business. It’s what keeps the drum beating and it should be taken care of with the appropriate level of importance. I hope this initial framework gives you a little bit more clarity on how to better manage your cash position in your business.
LiquidCFO is here to help business owners and startups to understand more about the market of Fractional CFOs and outsourced bookkeeping. We are the main independent platform that helps entrepreneurs and business owners to navigate the booming market of outsourced CFOs and help you with the best option for your business.
Sign up below and we will give you the best playbook to navigate a stress-free process for your business:
Leave a Reply