No Cash, No Company!



“Gimme a break! The importance of cash is basic! I get it that to survive I have to pay the bills”.



There is only one reason businesses fail. They run out of money. A cash position heading towards insolvency is actually the greatest risk facing a business. But it is surprising how many owners of SMEs do not give cashflow management its due importance. I notice this blind spot particularly in those who have come from powerful and strongly disciplined corporates, whose operating executives could leave the crucial matter of cashflow management to the accountants.

SME owners are usually strong in business development and operations, but not money. Their main metric is growth – the faster the better. They rarely appreciate that sales growth requires a lot of cash – for people and stock to fulfil the order, for more cash to provide credit terms and yet more to cover related overheads.   Being intelligent optimists with high self-regard but lacking in scar tissue, they often choose not to afford or tolerate accounting expertise.

One of the reasons for this may be that we lean too much on accrual accounting, accepting an accrued net profit as the bottom-line result. This is dangerous! In a risk management sense, free cashflows show the company’s true profitability. What matters most is the free cash generated from operating, which owners should track via a regular cashflow statement and forecast. Other sources of cash – being capital raised through equity investment and borrowing – are non-recurring, so not directly helpful for improved solvency.

Grant Field of MGI Australasia makes some excellent points: “The sad part is that in the vast majority of cases, business failure can be prevented if owners and chief executives focus on a few key parameters. Here are my key parameters to prevent your business becoming a statistic:

  • Leave your ego at the door. Growth is important, but unless you have the cash to fund that growth you’ll go broke.
  • Know your Return on Capital Employed (ROCE). You’ve got money invested in your business that needs to generate a return. Know how much you’ve got invested and what ROCE you’re achieving and what the drivers are to improve your ROCE.
  • Every business has a Sustainable Growth Rate – know yours. This is the rate at which your business can grow without adversely affecting your debt/equity ratio.
  • Watch your Free Cash Flow like a hawk. Free Cash Flow is simply the amount of cash you have left over out of your profit after funding growth. Many failed fast-growing businesses have negative free cash flow and that is why they fail. If you’re a fast-growing business and you’re not measuring and managing this you could be headed for disaster.
  • Know your Working Capital Burn Rate. Sales growth generally doesn’t fund itself. Know how much additional working capital you need for a given increase in sales. Don’t budget for sales growth in the next year unless you also know this key metric.”

With a Coalition government priming the pre-election pump, we forecast benign growth conditions ahead. Our caveat is access to adequate bank credit to fund the growth. Stay close to your banker!