the importance of cash
In business, there is almost nothing more important than cash!
Cash is the essential ingredient that enables a business to survive and prosper. It is also the main indicator of business health.
While a business can survive for a short time without sales or profits, without cash it will die. For this reason the inflow and outflow of cash need to be carefully monitored and managed,.
What is cash?
The first place to start is to consider what is meant by “cash”?
Cash is the measure of a business’ ability to pay its bills on time. This, in turn, depends on the timing and amounts of cash flowing into and out of the business each week and month – i.e. the cashflow of the business.
Cash does not just comprise notes and coins. Cash includes:
- coins and notes
- current accounts and short-term deposits
- bank overdrafts and short-term loans
- foreign currency and deposits that can be quickly converted to the right currency
Cash does not include:
- long-term deposits
- long-term borrowing
- money owed by customers
- stock
[Note: the items above are part of the working capital of the business]
The difference between cash and profit
It is important not to confuse cash with profit. Profit is the difference between the total amount a business earns and all of its costs, usually assessed over a year or other trading period.
The owner of a business may be able to forecast a good profit for the year, yet still face times when the business finds cash (the ability to pay bills) in short supply.
“Cash is king”
To make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. Unfortunately, no matter how profitable the contract, if a business don't have enough money to pay its staff and suppliers before receiving payment, the business will not succeed.
To trade effectively and be able to grow sales and profits, a business needs to build up cash reserves by ensuring that the timing of cash movements creates an overall positive cashflow situation.
Bear in mind, however, that having a lot of cash in the bank does not necessarily make good business sense. Cash needs to be invested in the business in order to make the best return for the business owners.
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