Cash is still King
Why Small Businesses Still Need to Prioritise liquidity
In an increasingly digital world, where electronic payments and online transactions dominate, it's easy to overlook the importance of good old-fashioned cash.
However, for small businesses, maintaining healthy cash flow remains a critical component of financial stability and success. Let's delve into why cash, whether this is the cash in your bank account or the cash in your till, is still king for small businesses.
1. Cash Flow is the Lifeblood of Business
Cash flow is the constant movement of money in and out of your business. Positive cash flow means you have enough money coming in to cover your expenses and invest in growth. Negative cash flow, on the other hand, can quickly lead to financial difficulties, even if your business is otherwise profitable on paper. Small businesses, with their typically limited reserves, are particularly vulnerable to cash flow disruptions.
2. Cash Provides Flexibility and Resilience
Having cash on hand, generally meaning that you have sufficient readily accessible funds in your bank account, gives your business the flexibility to adapt to unexpected challenges, such as economic downturns, supply chain disruptions, or sudden drops in sales. It also allows you to take advantage of opportunities that may arise, such as purchasing inventory at a discount or investing in new equipment.
3. Cash (paper and coins) is still a Universal Payment Method
While electronic payments are ubiquitous, cash remains a widely accepted and trusted form of payment. This is especially true for small businesses that may not have the resources to invest in complex payment processing systems. Accepting cash, in particular for small amounts, ensures that you can serve all customers, regardless of their payment preferences.
4. Cash Eliminates Transaction Fees
Credit card and debit card transactions often come with processing fees that can eat into your profits. Small cash transactions, on the other hand, are free of these fees, allowing you to keep more of the money you earn.
5. Cash Fosters Financial Discipline
Dealing with physical cash forces you to be more mindful of your spending. When you physically see the money leaving your hand, you're more likely to think twice about unnecessary purchases. This can help you develop better financial habits and avoid overspending. Using appropriate bank and budgeting apps can help you keep a very close eye on the movements in your bank account, and again, as with physically parting with paper cash, checking on this every time you make a transaction will help you keep a close check on unnecessary spending.
6. Cash Builds Trust and Credibility
Having a healthy cash reserve can help you build trust and credibility with suppliers, lenders, and investors. It demonstrates that your business is financially stable and capable of meeting its obligations.
Tips for Managing Cash Flow Effectively
Monitor Your Cash Flow Regularly: Keep a close eye on your income and expenses to ensure that you have a clear picture of your financial situation.
Create a Cash Flow Forecast: This will help you anticipate potential cash shortfalls and take steps to address them proactively.
Invoice Promptly and Follow Up on Overdue Payments: Don't let unpaid invoices drag down your cash flow.
Negotiate Payment Terms with Suppliers: See if you can secure longer payment terms or early payment discounts.
Maintain a Cash Reserve: Aim to have enough cash on hand to cover at least a few months of expenses.
While embracing digital payment methods is important, small businesses should not neglect the importance of cash and this works hand in hand with electronic payments. By prioritising cash flow and maintaining a healthy cash reserve (meaning cash in the till or availability of cash in your bank, you can build a more resilient and successful business. Remember, cash is still king, and it plays a vital role in ensuring the financial health of your small business.
Cash flow is the life blood of all small businesses