Cash - The Oxygen of Your Business

Pop Cash Quiz[1]

1.    According to a recent AICPA[2] survey of 500 small businesses with revenue less than $2 million what number of respondents indicated that cash flow from operations was the most important issue facing them

a)80%  b)60%  c)40%

2.    According to the same survey the following number of companies actively prepare cash flow budgets

a) 100%  b)75%  c)50%    

3.    And what number of respondents measure their return on cash spent on promotion and advertising

a)    80%  b) 50%  c)10%

It’s hard to understand why 80% of business owners say their number one concern is having enough cash to run their business yet only 50% of these owners actually use metrics of any kind to monitor cash flow and only 10% monitor the impact of spending on soft items, such as promotions and advertising

This survey is not surprising. I get a lot of calls from business owners that have suddenly realized that they only have a few months or weeks of cash left and need additional funds to operate. The lack of cash is one of the leading causes of business failures in the United States. It’s the oxygen of your business and we all know what happens when you run out of air!


Why Businesses Need Cash

Every company regardless of size needs cash to meet their obligations. In the short term that is the daily costs of running your business - operating costs and investments in inventories and receivables. But you also have to generate cash to invest in new capital equipment, meet debt obligations, and provide a return to investors. Companies with strong cash flow are also able to take advantage of opportunities presented when other companies are starved for cash and are willing to liquidate assets at a discount. And of course it’s great to have the “rainy-day” fund when business slows down.

Even profitable companies may have a problem meeting their obligations if they aren’t generating enough surplus cash. This is especially true of startups and growing companies. The financing of new operations, equipment and inventories can be a big drain on cash resources and if you aren’t monitoring this closely you could quickly run out of cash. Too many owners are focused on revenue and not cash. That reminds me of a quote from George Savage; “Revenue is vanity. Profit is sanity. Cash is reality.”[3] As my former business partner used to say “don’t tell me the revenue just how much cash I have for my family”. 

What Should You Do?

Simple – organize and plan your cash flows. They are easy to measure and easy to monitor. In my last business we always had a rolling six-month cash flow forecast and our budgets included a full twelve months of cash flow projections. This way we were able to plan for the months in the year where cash needs peaked.  

Here are four simple to do recommendations:

1.    Prepare a simple cash flow statement using the following format:


To better understand the impact of how cash flow statements work check out the following on-line quiz:

2.    Using this format prepare a cash flow forecast for a minimum of 4 months (16 weeks). This is usually the minimum your bank will want to see and will tell you your burn rate (utilization) of your cash.

3. Prioritize cash payments to your most important customers and debt holders and if possible negotiate longer payment terms.

4.    Collect your money as fast as possible using the following principle - always get paid, always remember to get paid, and never forget to always remember to get paid!

Remember “Cash is King” and is the oxygen for your business. Breathe easy !

Call us at (207) 846 5403 to get help with your cash flow planning and other financial accounting needs.

Darrell Pardy CPA CA


[1] Answers 1a) 2c) 3c)

[2] American Institute for Certified Public Accountants

[3] Greg Savage on July 14, 2015 in Financial ManagementManagement SkillsRecruitment