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As the UK teeters on the precipice of another recession – the third in a generation – businesses are once again reckoning with their financial situation in order to weather the economic storm. The term ‘cash is king’ once again gains prescience – but what does it mean, and how could it help you business in the coming months?
What Does ‘Cash is King’ Mean?
‘Cash is king’ is a popular business phrase, which essentially references the importance of cash as a liquid asset. Having cash on-hand and available to use can be a major factor in a business’ long-term stability, especially when it comes to the economic landscape.
Investments and non-cash assets are useful for growth in a stable economy, but lose their value in an unstable one. If a business leans too heavily on investment, thus reducing their liquid assets, economic downturn can see them deprived of the funds necessary to weather the uncertainty. As such, despite the relatively low yield of cash-based investments and savings, they represent a much safer, more secure way of maintaining and growing wealth as a business.
Why Businesses Need Cash
There are also evergreen reasons for which a business should maintain a healthy level of cash asset availability, which ensure the smooth running of the business as well as controlled growth. For starters, cash flow is one of the most important metrics for measuring the health of a growing business; positive cash flow means more is being received than is being spent, and indicates a healthy position with minimal debt burdens.
Meanwhile, negative cash flow illustrates a business spending more than it receives – whether due to investment or the paying of debts. Using income to buy stocks and non-cash assets that do not directly impact business growth serves to both reduce immediate cash availability and increase negative cash flow. Together, these can destabilise a business in poorer economic times, where reduced asset value and minimal spending power can cripple business value and operation capabilities alike.
Overcoming Cash Deficit
With cash investments a much less efficient way to passively grow funds, they may not be all that feasible for newer businesses – something which can stand them in poor stead when it comes to the possibility of an incoming recession. So, what can businesses do to overcome negative cash flow and remain solvent?
Firstly, consultation with financial specialists can help a business get a much clearer idea of its financial situation, whether through internal audit or exploration of assets and investments. From here, a viable strategy can be built that forefronts short-term cash flow and ensures a return to business solvency.
One of more direct ways to reduce negative cash flow is to bring forward any incoming payments. Receivables on 90-day pay notices, or generous credit agreements with regular clients, are useful from a customer service standpoint but can also arbitrarily put time between you and your income; asking your customers to temporarily accelerate their pay procedures can put money in your business’ hands quicker, improving short-term cash flow.