Managing cash can be tricky for a small or medium sized business. There never seems to be enough. For busy entrepreneurs that are running a business, cash can be an afterthought or a conversation best had with their accounting team when necessary. Entrepreneurs will focus on where the pressure leads them each day and unless their business has no cash, taking time to understand their cash flow is a task that doesn’t always make the top of their priority list. When a business has no cash, an entrepreneur will turn their attention to cash flow and attempt to quickly address any problems. Cash flow management is not meant to be a tricky exercise and can be a catalyst for fixing a broken business or allowing for measured growth.
I don’t think many entrepreneurs spend enough time understanding where the cash in their business is going and how it is being used. Understanding how profit/losses move from the income statement to the balance sheet can be a confusing concept if an entrepreneur hasn’t had the chance to learn how cash moves through their business. Because most businesses don’t have enough cash, I think entrepreneurs do the best job they can based on what they know. If entrepreneurs took time to review their business plan and their cash flow I think that many would be able to turn their business around or grow it by making very strategic (and tough) operational decisions. Much like any other asset or resource in a business, cash needs to be actively managed. I think it’s fairly common for entrepreneurs to treat cash in a very passive manner. If there is cash in the bank, the business must be doing well. If there is no cash in the bank, then the business must be having a tough time. Neither of these conclusions are accurate in and of themselves. Cash should be measured against a business plan and an entrepreneur should be maximizing the results that a business can get from it.
It doesn’t matter how large your company is, cash matters. Ford has $37 billion in the bank and is treading lightly with its cash as it moves into the next few years. Ford has planned a restructuring of their Europe and South America markets which is expected to cost $7 billion. It is expected that Ford will use $11 billion of its cash to invest in new electric and automonous vehicles and it needs to make sure it has enough money to ride out a recession when the next one comes along. The company continues to adjust for current market conditions which includes an announcement this past June that is it laying off 12,000 workers across Europe by the end of 2020. As margins are below expectations and lower than their competitors, Ford will continue to operate carefully which is a strategy every business should consider if the future seems uncertain. Cash matters.
The size of your business can change the size of your decisions but not the substance of them. Fundamentally every entrepreneur should know how their business uses cash and should have a fairly basic plan for how cash will support a business plan if an entrepreneur wants to succeed. Cash is a resource like any other resource that needs to be managed and accounted for. Many entrepreneurs have bookkeepers accounting for their cash but not necessarily managing it according to a plan. Whether your business is doing well or having a tough time, cash needs to be managed well.