We’ve all heard it; Cash is King. But do we understand it? Is it really that simple? What does this actually mean?
The first thing I learned as a young banker was this saying. I naively asked what it meant. I was told by my mentor it referred to two ideas; 1) having the ability to pay debts when do; and 2) having the cash available to take advantage of other opportunities when they arise.
The first essential requirement, from a financial point of view, to stay in business is to pay your bills when due. In order to do so, you need enough cash. And to have enough cash you must plan and generate positive cash flow regularly.
Other opportunities such as volume discounts or bargain purchases, can pop up unexpectedly and be a real chance to add to your bottom line. If you have the cash available you can take advantage of these without increasing the financial risk to the firm. If not…
Even the best companies periodically can run into a temporary cash deficit. Does this mean they are out of business; bankrupt? Not necessarily. In fact, it is very common for organizations to rely on a Line of Credit to fill in those gaps when they plan properly. (More on this in a future blog).
Remember, when you have enough cash you control your options. When you don’t; you don’t.
Tell me what you are thinking about these tips at DanielFeiman@BuildItBackwards.com
(Key words: cash flow, cash)