A focus on cash for many businesses is vital for the challenging months ahead, writes CRAIG ALEXANDER RATTRAY

“Cash is king”. A phrase that has been used over the years to highlight the advantage of holding cash compared to other assets. For the typical SME business owner, never has this phrase been more important. Anyone who doubts it should consider recent media coverage warning of the need to have cash at the ready.

We’ve been told that 33,000 Scottish businesses are showing signs of distress (Begbies Traynor report) and that Government backed Covid-19 support will soon dry up.

Then there is the impact of deferred HM Revenue & Customs liabilities now beginning to fall due, and the imminent end of 12-month holidays on Government backed lending with repayments falling due in the next quarter.

On top of all that is the potential reduction in appetite for lending among the banks as a result of this wall of debt incurred by many SMEs.

So how will many of these companies survive?

Profitability is always important as a loss-making business will never generate cash in the long term.  However, a focus on cash for many businesses is vital for the challenging months ahead.

It is also important that business owners understand the difference between profit and cash. No business can survive without cash (or adequate bank facilities). Cash has been the number one area of concern for most business I have worked with over nearly 30 years.

A Google search of “what keeps business owners awake at night” produces 18.6 million results. A review of these results shows that cash flow and cash management are the biggest challenges facing businesses. Business owners worry about many things, but cash flow is by far their top concern.

A Fin Pacific study stated that “69% of business owners report having sleepless nights over their cash flow”.  In “QuickBooks State of Cash Flow Report”, of the 44% of businesses that ran out of money, nearly half were taken completely by surprise.

These are concerning statistics, but what is of more concern is that according to a study by Intuit, 83% of businesses owners possessed a basic or failing grade of financial literacy.

Despite this, many business owners do not consider asking their accountant or other external professional to assist with cash flow or other forward-looking matters.

What is cash flow?

Simply, it is the flow of cash into and out of your business bank account.

Cash flow should be thought of in a similar way to fuel in your car or oxygen in the atmosphere – run out of fuel and the car stops, run out of oxygen and we die.

What is cash flow management?

Simply, cash flow management is a set of procedures, policies and actions that allow a business owner to track, understand and improve cash flow.

The goal of cash flow management is to be able to control cash, forecast cash inflows and outflows accurately, and to deliver positive cash flow.

Any business owner must understand the cash inflows, the cash outflows, and the precise cash position on an ongoing basis.  That is the key to effective cash flow management.

‘Those companies with real-time data and forecasts were able to adapt quickly and secure appropriate funding at the start of the pandemic’

By preparing in advance with cash flow management, shortfalls can be highlighted, action taken, and the business can continue to trade on a satisfactory basis whilst keeping all suppliers and employees happy and paid on time.

Successful cash flow management predicts cash inflows, cash outflows and the future cash position whether that is an excess or a shortfall.

According to a study by Fin Pacific, businesses managing their cash flow monthly have an 80% survival rate versus businesses that rely on cash flow planning as an annual activity.  That percentage increases by managing cash flow weekly or even daily.

Real-time data is vital for managing your business and cashflow effectively.

Those companies with real-time data and forecasts were able to adapt quickly and secure appropriate funding at the start of the pandemic.

That will remain the case going forward and as a result it is appropriate to remember that “cash is king”.

This article was first published on Daily Business (https://dailybusinessgroup.co.uk/) on 1 February 2021.