Business Survival - Why Cash Is King?


The main reason why most restaurants and retailers fail is they simply run out of money. In other words, they have a lack of positive cash flow that resulted in a depletion of capital reserves.

Now, let’s get deeper into the concept of Cash flow.

Cash flow is a simple concept that have been around since commerce was created. Simply put, cash flow is the amount of money coming in versus the amount of money going out of your business on a daily, weekly and monthly basis. Cash flows in when your customers or clients pay for your products or services. However, if the customer doesn’t pay at the point of product purchase, then then it goes into account receivable i.e. incoming cash flow that’s due and needs to be collected. Cash flows out of your business when you pay for salaries, taxes, expenses and monthly payments such as rent or loan repayments. If you are due in paying for something, then it will be account payable i.e. outgoing cash flow that’s due. If your cash that flows in is bigger than the cash flow out of your business, then you have a positive cash flow. In other words, you have enough money to pay your bills. In similar fashion, if your flow out is bigger, then you have overdrawn and you will need to find outside injection to cover your payables. New businesses will typically start with negative cash flow, which generally will be managed through working capital in the form of loan or temporary line of credit.image of stacks of coins

Then, isn’t cash flow is just profit?

No. It’s very much possible to have a profitable business with no money. Profit is an accounting term, while cash is amount of money you have in your bank account. Profit includes account receivable and your assets (e.g. your premises, your equipments, etc). If you use accrual based accounting, your accounts will show income when the invoice is sent, even though you haven’t receive the payment. So, if you have a problem collecting what’s owed to you, then you will not have no cash.

Why having a good cash flow is the pillar to sustainable growth in retail?

  1. When you have consistent positive cash flow, you are able to constantly re-invest in products that are working with your customers. You will be able to absorb the loss from non moving stocks with less trouble.
  2. You will be able to enjoy discounts from suppliers and avoid costs for supplier credit. Most retailers and restaurants will have a certain amount of credit from supplies, either in monetary term (RM5,000) or in time bases (1 month credit, which means you can pay one month late). These credit facilities will normally come with fees added to it (range from 5% to 10%). So, by having the cash flow to be able to pay on delivery will allow you to get discounts on the price and avoid the credit line fees.
  3. You will be able to have emergency cash stash. Most retail shops and restaurants will have unexpected expenses in the form of broken kitchen equipment that can stop you from operating. Having extra cash reserve allows you to have reserves to immediately replace and continue operation.
  4. You will lose the ability to be productive without good cash flow planning. Without sufficient cash flow, your business may miss opportunities in hiring, promotional efforts, inventory acquisition, technology upgrades, and more.

Steps to Ensure You have Good Cash Flow

  1. Increase your cash flow through sales - What do you do when you are running low on something? You add the incoming flow. In the same manner, if you are experiencing low cash balance, the obvious solution is to increase sales. Typically, you need to find ways to market or get the word out about your business for little to minimal cost as you can’t afford to increase your expenses. If you are running a restaurant, this will include 2-for-1 dinner promotions or early bird specials to bring in price sensitive customers.
  2. Decrease your Overhead through better inventory/product offering. - Another easy way to make sure that you have better cash flow is to decrease outflow. Although reducing your salary expense might be an option, but it might end up becoming a bigger problem. So, analysing your expenses and trimming fats from your inventory and payroll might be a better short term solution. For example, if you are a restaurant owner, it’s easier to look through your menu and trip non-selling items, saving you in inventory costs. Redesigning your menu or rearranging your shop to make sure that your high margin items are strategically placed.
  3. Proper cash flow forecasting is essential to being prepared for the unexpected. By staying proactive with predicting your cash flow needs, you can better prioritize those needs and develop a plan for handling emergency situations when they arise. Understanding the seasonal and cyclical trends (rainy season, more umbrellas sold) will also help you to see how your sales, and the corresponding cash flow, ebb and flow over time. That in turn, makes it easier to create an accurate forecast of your sales and cash flow projections.
  4. Using technology to automate  - Integrating available systems within your operations and cash flow management will allow you to automate and reduce any oversight significantly. Most systems will allow you to produce detailed reports. Example of how Dropee can do this for you:
  5. Diversify your supplier pool to allow you to enjoy seasonal promotions that the vendors might offer. It also allows you to restock with another supplier, if your current supplier ran out of the item. When a key inventory item is depleted, it’s your cash flow that suffers—especially if you’re not able to prepare certain dishes or move ahead with a scheduled promotion.

Do you have any tips that we missed? How are you currently managing your cash flow?

Let us know in the comments or share it with your friends that might find this valuable.  Check out more informative Dropee articles here!