Cash 101

Jack Welch famously said, “Number one, cash is king . . . number two, communicate, number three, buy or bury the competition.”  If cash is king, and number one on the famous CEO’s list, then let’s get to know cash a little better.

It has been said that cash is the fuel that drives a business or the gas that keeps the engine running.  Whatever metaphor you employ, the word cash is used frequently in business, but often kept obscure by accountants to describe its many different aspects.

Below is a reference of terms with definitions commonly associated with cash.

  • Cash Position – the amount of cash a business has at any given point in time
    • Cash on Hand – cash in bank accounts and cash and checks not yet deposited
    • Cash Equivalents – certificates of deposit (CD’s), short-term treasury bills, and money market certificates that can be converted into cash quickly (less than 90 days).
  • Cash Flow – the volume of cash that flows through a business as a result of operations over a period of time
    • Cash inflows – cash received in the form of sales (products and/or services)
    • Cash outflows – cash paid for company expenses (payroll, rent, taxes, etc.)
    • Positive cash flow – total cash inflows are greater than total cash outflows
    • Negative cash flow – total cash inflows are less than total cash outflows

Best Practice

No firm better exemplifies the mastery of cash than Dell Computer.  Traditionally, inventory is first purchased (cash outflow), sold to a business, and payment is received (cash inflow) in 30 days.  Dell on the other hand, receives payment (cash inflow) first for orders received, and only then accepts inventory from its vendors to assemble computers which it sends out in 2 or 3 days.  Dell’s vendors are paid (cash outflow) in 30 days, thus turning the traditional cash cycle on its head.

A community banker once told me, “If your cash don’t flow, your business won’t go.”  If your small to mid-sized firm is cash challenged, I may be able to help

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