Tag Archives: working capital management

Why Cash is King

You have all heard the expression “Cash is King”. Did you ever think that it applies to the way you manage your business? Well read this!

As you manage your business from day-to-day you need liquidity, that is cash. Cash is required to pay your bills from suppliers to your utilities bills and even your employees. So, where is this steady flow of cash coming from? Your customers!

Your accounts receivable levels are important to watch. Bills are usually collected on a 45 day basis. Some customers may even pay sooner than that. Those customers are gold.

You should indicate clearly on your invoices what the terms of payment are. These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due. You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days. This customer is costing you money! You are actually financing this customer to the tune of 36% a year. That is an incredible financing charge. Did you ever realize that you were becoming a bank by not collecting on these invoices? Therefore, it is critical to your cash flow to collect the amounts due you promptly. Hence, the time value of money. A dollar today is worth more than a dollar tomorrow.

A good tool to use that can be provided by your bookkeeper is the Aged Accounts Receivable Report. This report will indicate how long your invoices are outstanding and which ones to watch closely for delinquency. Your current ratio will be improved with monitoring.

Follow-up calls to customers are important to remind them that the invoice is due. These calls will also reveal to you whether the order is received in good order and if the customer is happy with the shipment. Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.

If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away. Making an installment plan with him is beneficial to you and to him. You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.

Now you understand why “Cash is King”.


Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.
She is the author of Love and War, the Human Side of Business.

Keep Your Eyes on the Books

In teaching BE 261 and CEO 003 I often tell my students that they should at least understand the accounting and bookkeeping practices involved in their businesses. They should be able to speak the language of their accountant or bookkeeper and be able to ask for periodic reports to enable them to review their business’  financial position at any point in time. The several accounts to be mindful of are the following:

Cash. All of the transactions your business has pass through the cash account whether it is for the receipt of collections or the payment of bills. Some bookkeepers use two journals – cash receipts and cash disbursements – to track activity.

Accounts receivable. If you are a manufacturer or a service provider and you don’t collect payment immediately, you will generate “receivables”, and you must track them by having your bookkeeper generate an aged receivables report indicating which customers owe you money and how long the bill is outstanding. An effort to collect “old” bills is required to get your money. Busy businesses generate an accounts receivable report daily. But it is up to you how often you would want to see this report. But you should review this report weekly for any potential problem accounts.

Inventory. Products you have in stock to sell are your “investment” sitting on the shelf and must be carefully accounted for and tracked. Periodic audits of what you have on the shelves and what you have in your books must be compared and verified. It is important for you to determine what level of inventory is needed in order to satisfy your customers’ demand to avoid any write-downs of obsolete or damaged inventory.  An analysis of the levels of stock will help you do this.

Accounts payable. No one likes to pay bills and send money out of the business, but if you have good bookkeeping practices you will have a clear picture of everything if you use your accounts payable feature on your bookkeeping software. You will have timely payments, and you will not pay anyone twice. Paying bills early may qualify you for discounts with your vendors.

Purchases. The purchases account is where you track any raw materials or finished goods you buy for your business. These work- in- process accounts are part of your inventory account, and they can help you calculate your cost of goods sold, which is subtracted from your sales to find your company’s gross profit. Here you will be able to see if you are paying more for your raw materials and take measures to reduce the costs of them and improve your profit margin.

Payroll expenses. One of the largest expenses for all companies is the cost of paying employees. Keep this account up to date for meeting tax and other government reporting requirements.

It is important to note if you cannot hire a bookkeeper that you purchase a good bookkeeping software package, like QuickBooks, to help you organize and track your sales, collections and inventory.


Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.