The popular saying “Cash is king” is so very true, especially for businesses. There is no activity you wish to carry out that does not involve cash, whether in raw currency or debt. The more cash a company has, the easier it is for them to meet their obligations. While a company needs to keep a healthy amount of cash, it is not advisable for it to keep too much in its raw form.
The cash activities of a company are typically divided into 3 – Operating Activities, Investing Activities and Financing Activities.
These are the day-to-day activities of the company resulting in income and expenses, gross profit and net profit. They are the functions of a business directly related to providing its good and services.
These are activities stemming from the acquisition and disposal of long-term assets. When a company makes investments, the cash flow from these activities can be used to augment the business as it grows.
These are the activities that show how the business is funded whether through debt, equity or dividend. This forms the capital structure of the business.
What do you do when the business is running out of cash?
- Ensure your business has a strong credit line for short term loans. If you don’t have a credit line, you will most likely underperform.
- Ensure that your business is liquid at all times.
- Have enough current assets that you can dispose of, for cash.
- Ensure you manage your account receivables and payables.
To be a well-structured business is to have these three activities in proper play within the organization. What activities impact your cash flow? What advice will you give to a company struggling to remain afloat due to cashflow problems? Remember the saying, “Revenue is sanity, profit is vanity and cash is king.”