However, it is easy to forget that when invoices are sent out for services rendered /products and payment terms are agreed to and in place, that your profit and loss statement does not reflect what’s currently in the bank.

There is a great saying that always need to be remembered when thinking about cash:

“Revenue is vanity, profit is sanity and cashflow is reality.”

Short and to point that this phrase helps put the emphasis on 3 key aspects:

1. Revenue, while a necessity, isn’t the best indicator of a flourishing business. There could be various associated costs to getting your product or service to the market and doesn’t tell the full story of how your business makes money.
2. Profit indicates the sustainability of a business and whether the business model (the way the business generates) earnings works or not.
3. Cash – money in the bank or the availability of cash – allows you to make decisions (transact) for expenses such as salaries, supplier payments or rental agreements. Without this, your business cannot operate.

“Cash is King” doesn’t only mean looking after your cash on-hand. You need a combination of efforts to keep your cash from running dry. Most importantly, you need up-to-date financials and management accounts. These include debtors and creditors age analysis and a short-term cash flow forecast.

Further to having updated Management Accounts, it’s also important to keep an eye on your Liquidity Ratio. This is the ratio that compares your business’ Current Assets to its Current Liabilities. Ideally this should always be higher than a 1:1 ratio i.e., Current Assets are greater than your Current Liabilities.

Your Current Assets and Current Liabilities are effectively your cash on-hand or cash you should have access to on short notice ie savings, overdraft facility

The importance of this is due to your business needing a cash injection for an unexpected drop in your cashflow cycle.  Your bank or potential lender will use this as an indicator to measure your ability to repay that loan/overdraft.

This brings us to our last point, having cash is your number 1 priority, but a very close second is access to cash.

Access to cash can be a few things; savings or reserves, short-term loans or overdraft and credit. There are varying views when it comes to the use of these facilities as an inability to repay any of these leads to constant interest payments or worst case, the facility gets called in. However, if managed correctly and not over-extended, these facilities give you the opportunity to mitigate dips in your cash cycle.

Another important consideration, when you have cash it’s easier to apply for and be approved for additional facilities. It’s when you need cash, that these opportunities diminish. Therefore, apply for these facilities when you don’t need them, for the times when you do. Just manage how you use them!