July 5, 2020

SB-Accounting

Accounting + Finance Blog

Six things you should know about The Cash is king mantra.

Six things you should know about The Cash is king mantra.

image credit: Nairametrics

A mantra is a powerful tool for businesses. Today’s mantra gist is on “cash is king.” The saying that profit is in Excel and cash is king is true anyway. Though, profit can never be thrown under the carpet.

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In a tweet by Ope Adeyole, an entrepreneur in the Nigerian tech ecosystem, he made it clear a fundamental truth “cash (flow) is real profit is in Excel.” What he may have implied is that Cash is what you can see, however profit can never be seen, it is written in MS Excel. No wonder the mantra “cash is king” is timely.

You might ask, why do entrepreneurs need to put this mantra as one of the core mantras in their business? Here are six reasons this should be done.

Cash is an important business asset

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One reason I could put together is that cash is an important business resource. Without cash, there is virtually nothing a business can do. Cash as an asset also includes cash equivalents.

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Cash and cash equivalents include:

The physical cash or cash in the vault,
Cash at bank,
Cash in a call account (fixed deposit)
Cash in treasury bills and other short term investments.

In fact, having cash in each of these facets is prime to the business at any point in time. When the physical cash is unavailable, the entrepreneur can convert any of the other cash equivalents to physical cash at a point in time.

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Cash is required as capital

To start up a business requires capital. This capital is mostly in the form of cash. Individuals sourced for capital from past savings, loans from banks, family, and friends; as well as grants from government, family, or friends.

Large businesses on the other hand source for capital through loans from banks, share, share capital, other investment platforms (e.g venture capital), and grants from the government.

Cash is used for business activities

Cash is needed to maintain a business. Without cash, it is impossible to pay salaries and other consultation fees. Also, cash is required to pay bills such as electricity bills, fueling the business generator, or servicing its solar panels.

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In summary, cash is needed for the day-to-day operations of the business. This type of cash is called operational cash.

Cash is paid to stakeholders

Another thing that makes cash king is that it is used to meet the demand of stakeholders. These stakeholders include banks, tax authorities, and shareholders.

Cash is used to pay up loans and the interest attached to it. It is by cash that taxes are paid to the government. And of course, it is required to appease shareholders through dividend payments.

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Cash is required for expansion

What’s more? Cash is used to expand a business. A business planning for establishing a branch office definitely needs a case. Buying new machinery or equipment to meet increasing customer demand requires cash. Really, it is the king!

Cash must be monitored. It is the cause of fraud in businesses

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Failure to monitor business cash can lead to fraud. If employees that handle cash are not closely monitored, it may lead to an act of fraud.

Of course, the employee would be blamed for a lack of morals and probably disengaged. But, such cash may not be available as and when the business needs it.

Three ways to monitor cash are cash budget, the use of an imprest system, and reconciling bank statements with the cash till balance in the business.

To conclude, cash is indeed king! A business can be ruined if its cash cannot meet present obligations. Therefore, every entrepreneur is obliged to make cash as one of its core business mantras.

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