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Cash is king. It’s a short sentence or phrase oft-quoted in relation to Arab countries such as Egypt. And usually it refers obliquely to the reticence many Egyptians have in placing all of their financial eggs in the one labyrinthine banking basket. At least, that’s how they perceive it. But the truth is much of the mistrust is also a consequence of under-banking. The majority of Egyptians don’t earn enough to even have a bank account let alone something as alien as a credit card. Therefore, they’ve no opportunity to experience any of the modern-day banking benefits most of us rather take for granted. Instead, they carry on as they’ve always done, paying cash for the everyday necessities as they go along.
However, in the world of business, cash is also king – or to be more precise, cash management is king. In fact, many even define cash management as an art, often bemoaning how it seems to have become a lost one at that. Certainly, quite a number of years ago, Donna McGovern, owner of California-based Ideal Business Solutions, cited cash flow as the most important ‘number’ which businesses needed to be aware of. She was speaking in an article published in the Fredericksburg daily newspaper, The Free Lance-Star, in 1999.
Now, critics may be quick to point out that that was a long time ago. Fair enough, but the business fundamentals have changed very little since then. What was true way back when is just as pertinent in today’s competitive and highly complex business environment. Cash management – managing the flow of cash – is a vital ingredient of survival, if not of success itself.
According to the article, if McGovern had to pick one number then she’d choose cash flow: the difference between the cash with which you start the month and the cash at the end. If the latter number is the larger then you’re on the right track.
“Cash is king,” McGovern is quoted as saying. “Businesses can have an excellent-looking income statement and be flat broke.”
If McGovern had a second choice of number, the article continued, then she would look at gross margin for each product and deal. Gross margin, or gross profit, is the money left when the cost of the goods sold is subtracted from net sales – revenue minus any discounts or allowances given to customers.
McGovern explained, “A small-business owner may have a favourite product; it may even be the best seller; but it may not be profitable.”
Fast-forward to today and to another article entitled “The Art of Cash Management” which appears on the Inc.com website. Again, Donna McGovern is featured prominently. And so is Stephen King, president of Virtual Growth, a New York City-based financial-consulting firm that handles outsourced comprehensive accounting services for companies.
According to the article, there may be no financial discipline that is more important, more misunderstood, and more often overlooked than cash management. “Business owners should be thinking about this issue from day one,” says King. The full article, which is well worth spending a couple of minutes reading, is available here.