Why Should I Care About My Numbers?

Cash is King!

This saying can be interpreted in various ways. Typically with small business owners this term means “ cash equals business health”. That is if I have cash in the bank we are doing well and the more cash the better we are doing. Of course we need positive cash flow to run our businesses and it certainly is an indicator of health within a business. Though I would say negative cash flow is more of an indication of poor health.

The issue that I typically see is that business owners aren’t really looking at cash flow, that is as it ebbs and flows instead they look with one eye open at their bank accounts hoping rent and payroll will clear. Giving themselves a high five if they have a couple thousands left over afterwards. I want to explain the importance of understanding cash flow and give a few examples of how your monthly financial statements can have a greater usefulness to you.

First let’s define some terms

Liquidity simply is the access your business has to liquid assets the quicker something can turn into cash the more liquid it is. Cash being the definition of liquid and something like real estate being not very liquid. Real Estate would be low on our liquidity index because it takes time to sell a property and turn it into cash.

All business needs some liquidity and each type of industry has different needs. Your liquidity needs must be defined. We work closely with our clients to help determine how much cash they need in the bank at any given time. Sometimes cash is needed in seasonal businesses where you know the 4th quarter is going to dip so the quarter 1 -3 during the year you hoard extra profit. Some companies are in a risky business and they know that they need high liquidity to survive a short term downturn.