Cash is King

Over the years, companies come and go. Some succeed and others fail.  The interesting part about the companies that fail is that it's often not bad ideas or bad management that cause their demise, rather, they simply run out of cash. A good example of this is restaurants. Restaurants tend to require a lot of cash in order to get started--primarily equipment and inventory. By the time they open their doors, they have no cash left to carry the operating expenses while waiting for sales to ramp up. This is precisely why so many of them fail within a short period of time. You have to wonder if they had just a little bit more cash to carry them for a few months whether they would have turned the corner and been successful. Who knows?

What I do know is that the text is accurate in saying that "cash is king."  Cash allows organizations to take chances, to invest in research and development, to attract talent, and the list goes on and on. On the other hand, cash strapped companies are limited in what they can do and the lack of cash keeps them in survival mode. It's the equivalent of someone that lives paycheck to paycheck; it doesn't allow for anything to go wrong--and we all know that things do go wrong from time to time. Unless you are the federal government and can print your own money, every organization runs the risk of running out of cash. Therefore, often cash management is the single most important function in a company.

The topic of profit without cash and cash without profit is worth further discussion. We tend to think that when an organization is profitable, it has cash. This is logical, but not always true. Consider the pair of sunglasses we talked about earlier when we examined the question: When does the sale happen? If someone buys your sunglasses and doesn't pay you at that time, you no longer have your sunglasses and you also don't have any cash. What you have is a receivable or a promise to pay you. Your P&L statement will show a profit, but for this transaction you are cash poor. When you have cash, you have options. You could buy another pair of sunglasses; you could keep the cash in your pocket, etc. The point is that when you have cash in hand, you have flexibility; when you don't have cash, you are limited. In other words, cash really is king.

Cash is so important it has its own financial statement. The purpose of the statement of cash flows is to tell you where cash came from (inflows) and where it went (outflows). However, the statement of cash flows is not an easy statement to read or interpret. Leave it to accountants to complicate such a very simple concept!   As an HR specialist, there is no need to actually prepare a cash flow statement. However, you should have a basic understanding of it. So let's break it down.

The cash flow statement is comprised of three separate categories or activities – operating, investing, and financing.

• The operating section relates to the actual operations of the company. If we sell widgets, this section lets us know if we increased or decreased cash as a result of producing and selling widgets.
• The investing section tells us whether we have increased or decreased cash as a result of capital investments related to producing and selling widgets.
• The financing section relates to money that has been borrowed and paid back in order to produce and sell widgets.

The net cash in and out of these three activities tells us the net change in cash from the beginning of the year. Those are the basics of the cash flow statement. But the most important thing to keep in mind is that this statement tells you what happened to cash (net increase/decrease) from the beginning of the year.