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Tip 9. Cash Is King


No doubt you've heard "cash is king" before, but what does it really mean?

Cash itself has very little actual value. That is, the notes and coins are generally worth less than the intrinsic value of the currency (the paper of the note or metal in the coin).

Despite its actual value, cash has a high perceived value. This stems from the government setting and underwriting the value of each note and coin (you can tell this by a government representative's signature on each note). The public gains confidence from this guarantee and readily accepts cash as payment for debts owing.

I like to think of cash as the lowest common denominator in a transaction. I enjoy asking what's the cash price, as this is usually lower than all other prices. Cash is the best bargaining tool, that's why it's king.

The quickest way to go out of business is to run out of cash. People usually demand payment in cash and if you can't pay then you have to either borrow money or sell assets quickly (at their cash price).

If you stopped receiving cash tomorrow how long would you survive? If it's less than three months then your business has cash flow management problems.

Preparing a cash management strategy is a great way you monitor and control the cash you receive, spend and invest. It generally has the following components:

  1. Bank Reconciliation
  2. Cash & Cash Cycle Monitoring
  3. Investing Spare Cash

Bank reconciliation

Have you ever received a bank statement and thought you had more money in the account? Bank reconciliations help explain why.

The differences are probably a combination of:

  1. Deposits that you have recorded in your accounting systems which haven't shown up in your bank account yet;
  2. Checks that you have written which haven't been presented yet; and
  3. Bank fees charged to your account that you don't know about
Doing a regular bank reconciliation helps you:
  • know how much "committed funds" are in your bank account, which will help you avoid writing checks for more money than you have;
  • help you identify which checks haven't been presented yet.

The longer you go without reconciling your bank account the harder the reconciliation process becomes. It may seem like a chore but:

a properly balanced bank account will save you a fortune in accounting fees.

One of the first things your accountant will do when preparing your annual accounts is reconcile your bank statements. This is generally a very labor-intensive task and could cost a lot of money. If you can't or don’t want to do it then hire a contract bookkeeper - it will usually be cheaper than getting your accountant to do it.

Completing your bank reconciliation is a great way to begin or enhance your financial intelligence.

Daily Cash Reporting

Always start the day knowing how much money is in the bank. I recommend receiving a daily summary of cash to keep track of how much money you have received and in what format (cash, credit card, electronic funds transfer etc.). I like to keep up to date and know who is paying me.

Every day you bank more than you spend improves your cash position.

Monitoring Your Cash Cycle

Your cash cycle is your business lifeblood. It's calculated as the sum of the number of days it takes to buy goods, sell them, collect the sale proceeds and pay the debt.

A simple rule is to collect more money from your trade debtors (people who you have sold to on credit), than you pay to people who provide you with credit (your trade creditors).

If you pay your creditors before you get paid from your debtors, then you would usually fund this with an overdraft account, other loan finance or from savings.

The minimum you should aim for is to pay your creditors at the same time you receive money from your debtors.

How do you monitor your cash cycle?

Step 1.

Begin by calculating how many days it takes to collect money from your debtors. Do this by:

  1. taking your average debtors balance for the period, and
  2. dividing it by the sales for the same period, then
  3. multiplying the result by the number of days in the period.

Use the calculator below to help.
(Version for service businesses coming soon)

Debtors at start of period ->
Debtors at end of period ->
Average Debtors ->
Credit Sales in the period ->
Days in the period ->
Days it takes to collect debts -> (rounded)

Step 2 - Creditors

Now do the same for your creditors. Do this by

  1. taking your average monthly creditors balance and
  2. dividing it by your monthly purchases then
  3. multiply the result by the days in the month.

Use the calculator below to help

Creditors at start of period ->
Creditors at end of period ->
Average Creditor Balance ->
Credit Purchases in the period ->
Days in the period (same as Step1) ->
Days it takes to pay debts -> (rounded)

Step 3

Now, calculate how many days it takes to sell your stock. This is done by

  1. taking your cost of goods sold and
  2. dividing it by your average monthly stock balance then
  3. multiply the result by the days in the month.

Use the calculator below!

Stock Balance at start of period ->
Stock Balance at end of period ->
Average Stock Balance ->
Cost of Goods Sold in the period ->
Days in the period (same as Step1)->
Days it takes to sell stock -> (rounded)


Days it takes you to sell your stock and collect the debt-> days
Time that you pay your creditors -> days
Difference in cash cycle -> days

Remember each day that you receive more cash than you pay out is making you wealthier.


‹ 0 You are likely to be currently experiencing cash flow problems. Look at ways to improve your debtors/stock turnover while delay paying creditors. Seek urgent help from an accountant.
0–10 This is a satisfactory outcome but you probably still suffer an occasional cash crisis. Look at refining stock management or debtors collection policy.
›10 Well done. You probably have an excellent cash flow model. If you are still experiencing cash flow problems look at reducing overhead costs or finding other operational efficiencies.

Investing Spare Cash

The final component to your cash management system is to invest your spare cash. Don't leave it in a low interest bearing account. Have your money working for you all the time, even if it's only for one week.

Steps For Immediate Results

  1. Establish an internal system for monitoring your daily cash flow. Avoid using your overdraft to fund overhead items like salaries.

  2. Use the calculator to ascertain your cash cycle. Play around with it and use it as a budgeting tool.

  3. Don't leave spare cash lying around. Set up a cash management account to pool excess money and start earning extra interest.





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