What you are told

Anyone who reads business advice has heard the saying “Revenue is vanity, profit is sanity, but cash is king”. You will be told “Cash is King” time and time again.

Political campaigns have been condemned because of the use of “three-word slogans”. This is a three-word slogan. Yes, there is some merit in it. But the danger is that it will cause management to place too much focus on the short-term management of cash reserves.

The reality

We need to reinforce the reality. Cash is not King. It is the complete opposite. It is your servant. You control it, it does not control you. I agree that cash is critically important. But let’s put it in its place. It is a necessity for a sustainable business. But so are customers, suppliers, staff, systems, and other keys to business sustainability.

If you have an unsustainable business model, or a poorly performing business, you will fail. That failure will be consummated when you run out of cash.

Cash reserves need to be managed proactively. But you need to understand whether you are just “rearranging the deck chairs on the titanic” or whether you are actually creating a business that generates ongoing positive cash flows.

How does this impact your management

If you are micro-managing cash, you are dealing with a situation of insufficient funds. Micro-managing cash refers to activities involved in identifying specific daily (or weekly) cash inflows and outflows to ensure there is sufficient cash in the business to meet its day-to-day commitments. Micro-managing cash is a costly activity, and we encourage any business in this situation to overcome the need to do this as quickly as it can. The costs involved in this include:

  • Administrative time preparing detailed spreadsheets
  • Administrative time managing suppliers and other commitment liabilities
  • Diminishing supplier confidence causing your business to be a lower priority
  • Diminishing employee confidence with a range of negative responses

We recommend that a cash ratio (cash/current liabilities) target range be settled on and a plan initiated to get the cash ratio into this range. A ratio of 0.5 to 1.0 is generally a safe area. This will, of course, depend on the exposure of the business to seasonal issues and risk factors (e.g. a key debtor goes into receivership).

Wealth Engine impact on cash management

The ceefo Wealth Engine program has a primary focus on how the business can invest in itself so as to grow its return on equity whilst growing the level of net assets in the business. In the circumstance where a business is needing to micro-manage its cash, the Wealth Engine program would include investing in the cash reserves of the business so that the micro-management of cash can cease. This will provide a significant return on investment for that business.

The funding of this investment may come from working capital finance (e.g. invoice financing), from an injection of capital or from other means such as sale and leaseback of fixed assets or the sale of redundant assets.

This would be the necessary first investment for a business following the ceefo Wealth Engine program. The ceefo Wealth Engine program will also address the “deck chairs on the titanic” issue as well as through its 5-year ROE (return on equity) planning model.

Ask your CFO or advisor to implement the “ceefo Wealth Engine Program” and support you to establish and maintain your own WEALTH ENGINE.