HAROLD GENEEN ON WHY CASH IS KING
Use this to remind you that cash flow is more important than profits.
Harold Geneen (1910–97), was President of the ITT Corporation of America. In a long and distinguished career, he came to recognise the pre-eminent importance of cash to any organisation:
The only unforgivable sin in business is to run out of cash.
Harold Geneen
It is surprising how many experienced managers fail to understand the difference between cash and profit. It is entirely possible to have cash in the bank but make a loss. It’s also possible to have very little cash but be raking in large profits.
For example, a company’s sales may be rocketing. However, if the organisation is paying its suppliers every 30 days while its customers are taking 50 days plus to settle their accounts, it’ll quickly run out of cash and end up insolvent because of overtrading.
Insolvency occurs when an organisation has insufficient cash to pay its debts as they fall due. Insolvency can be a temporary affair lasting just a few days or weeks as the organisation waits for a large payment. In such cases, it’s likely that you’ll be able to arrange a loan or overdraft from your bank. Alternatively, it can be an early warning sign that things are going downhill. It is illegal to continue trading if you are insolvent. That is why cash is, and always will be, king.
WHAT TO DO
- Constantly look out for signs of insolvency: for example, suppliers complaining that they haven’t received payment or that payments are delayed, delays in purchasing essential goods or materials and, most telling of all, any delays in the payment of wages or salaries.
- Insist on receiving a cash-flow report from your accountant, at least monthly, which shows the projected cash flows for the following three months. Recognise that the figures for the first month are likely to be fairly accurate but thereafter the level of accuracy decreases.
- If you are suffering from cash-flow problems, insist on a weekly report covering the next 12 weeks.
- Mere receipt of the report will not improve your cash-flow position. You have to take corrective action. Working with your accountant and those responsible for sales, purchases and credit control, identify where the problems lie and take remedial action.
- Examine the aged debtors list first. Develop a strategy for collecting all debts that are in excess of your normal terms and conditions or where an extension has been negotiated by the customer.
- Possible problems include:
- Allowing sales to continue trading with slow payers and/or those who have a poor credit rating.
- Granting buyers unsustainable credit terms. Once in a blue moon you might extend the payment date to help out a valuable customer to, say, 60 days. But you can’t offer such generous terms as a matter of policy if you are required to pay your debtors within 30 days.
- Failure to supply managers with an aged debtors report and to require them to take corrective action. This may mean refusing to sell any further goods to a customer until they clear or reduce their debts.
- Failure to issue sales invoices the same day as goods are despatched.
QUESTIONS TO ASK
- Do I see cash-flow problems as something that the accountant is responsible for?
- Do I know the effect that the accountant’s actions have on my customers/suppliers?