Why Cash is King (or the importance of cash flow and strong accounting)

5 years ago

You may have heard the phrase ‘Cash is King’ many times before but not given much thought as to what it really means. According to Wikipedia, the phrase was first used publicly during the global stock market crash of 1987 by Per G Gyllenhammar, the CEO of Volvo but it’s since been adopted as a way of emphasising the importance of cash flow in a healthy business.

No matter if you are a sole trader or a large multinational corporation, the fundamental principle is the same in that you need more cash coming in than you have going out if you want to avoid the risk of going bankrupt.

I learnt this the hard way whilst working as a graduate trainee Web Editor for British Airways in 2001. On paper, the company was worth millions and had considerable assets including a brand new fleet of state of the art aircraft. However, the company was hit by a series of unfortunate and unforeseeable events in quick succession which made it ‘the worst year’ in BA’s recent history (according to their own 2001/2002 Annual Report & Accounts):

  • the grounding of Concorde following the tragic crash of Air France Flight 4590 the previous summer
  • widespread economic recession and a relatively high value of Sterling
  • the outbreak of Foot and Mouth Disease reducing the number of tourists travelling to the UK
  • the terrorist attack on the World Trade Centre in New York on 9/11 and its global repercussions (including a 60% fall in passenger numbers and revenue loss of £48million)

Any one of those events on their own would have had a severe impact on the bottom line of the business but combined meant that BA’s profits fell by 70% in the first 6 months of the year and they just about broke even in the latter half. Lesser companies would have gone under but BA’s management and board somehow managed to pull through after making some very difficult decisions like a 20% reduction in staff including the premature termination of my employment contract (last one in, first one out)!

In the months leading up to my redundancy in November I remember the all-staff meetings where we were kept informed of developments and repeatedly told that ‘cash is king’ without fully realising the enormity of the problem and that my job and of many talented people around me was actually under threat. Still, I’m proud of my time at BA and emerged from the experience stronger and more resilient. (It also spurred me on to spend the next 12 months pursuing a career in the music industry)!

Obviously, this is an extreme example and hopefully none of you reading this will ever have to go through such a difficult time in your personal life or with your own business but it did teach me a valuable lesson that strong financial management is the only thing that will see you through when times are hard and your back is against the wall.

This is one of the reasons why I decided to join the Sage One team having spent the past 4yrs working with start-ups across the UK at Shell LiveWIRE. Many of the entrepreneurs I met during that time had sporadic levels of income and often took at least 12 months before the money really started rolling in with any form of regularity. Another problem I saw was when businesses grew rapidly, which was obviously good but meant that they had to buy large amounts of stock upfront without receiving payment from buyers for another 3-6months which was putting a serious strain on their finances.

So, my advice would be to not leave anything to chance when it comes to finance, make sure you always have your finger on the pulse and remember the ‘cash is king’ mantra to stay focused. I want to help more UK businesses become financially sustainable and genuinely believe that Sage One offers the best all-round subscription-based accounts software and 24/7 support service on the market. I hope you’ll give us a try and look forward to helping your business grow with us over the coming months and years!

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