Finance is the common currency of all businesses and Cash the most liquid of this currency.
Emerging significance of Cash Management
Every now and then phrases like ‘Cash is King’ or ‘Cash is the most supreme measure’ have echoed in the business corridors. The one most important measure for key decisions; be it project evaluation, M&A or investment decisions, has always been ‘Cash generation’. Cash generation is usually represented in the form of monetary assets (not vague / illiquid assets).
Profit, as a measure for key decision making, has always taken second place. Why is this so??
Cash as the most fundamental measure of financial evaluation
Cash generation is the most holistic measure, as it considers the net result of all business transactions and brings it down to a common denominator. It does not just measure profit alone, but also factors in the cash locked up in working capital and in capital investments; whilst measuring business results. At the end of a project cycle, cash generation is thus the free cash available with the business after all transactions are converted back to cash or its equivalents.
Important metrics such as IRR, NPV further consider the time value of this cash generation and are considered for decision making in key investment matters. Cash generation is most easily understood as there are no opinions in it – its presence or absence will show up!!
Cash is reality, while Profit is an opinion.
Cash management and Startups in the ‘new normal’
Cash management is the one thread that connects a great product, the aspirations, to its ultimate success. Needless to say, the concept of cash management is different for large entities compared to Startups. While in the former it is more about managing the cash reserves optimally and rotating cash better, in the latter it is much, much more.
This new normal has forced all businesses to re-think and re-position themselves, look at adjacencies and pivot their business models where required. The one asset that needs to be managed best in this turbulent and volatile period is Cash.
In this ‘new normal’ cash management has become most important for startups and small businesses as these organizations tend to have limited access to cash and the need for cash for growth is also very high here.
Facets of Cash Management for Startups in the new normal
- Optimal planning and building cash efficient business models
- Optimal deployment of cash which is not about just holding and preserving cash but using it to its best effect.
- Optimal sourcing and management
If optimal planning sets the boundaries, optimal deployment makes the best use of every penny. This is not a regressive facet, one that is bent on squeezing and reducing cash burn, but is actually one that optimizes cash.
Optimal sourcing has never been more important. Knowledge of alternate sources and avenues of cash is most important in this so-called uncertain phase.
And of course, managing the cash – extending the runway, finding alternatives pivoting business models, finding business models with shorter cash cycles et. This is the business / operations face of Cash management.
Be Cash Smart – embrace good cash management policies
Cash Management is a ubiquitous part of business management- a common binder; a glue, that keeps things together. It is about money but not only about money. There’s more to it; a predictive side, a management side and a governance side.
Startups and SMEs invariably have small core teams; the entrepreneurs are often not too conversant with cash management. In their struggles to build the businesses with limited resources, quality cash management tends to take a backseat and thus leads to many a failure.
Let not the absence of good Cash management derail you. Instead let its presence lift you.
Mani Padmanabhan, Finance Advisor & Startup Mentor, is a member of InfinumGrowth’s panel of Coaches & Mentors.
Check out this Learning Video by Mani Padmanabhan on Startup Fundraise
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