Cash Is King

Even with all the advancements in technology, one thing that never changes is the need for cash. As a society, we rely on this single form of currency to conduct our daily lives and make transactions because it’s easy and convenient. But there are also downsides to relying solely on cash: fractional reserves cause inflation and limit opportunities for unbanked populations around the world. Are crypto-backed currencies like bitcoin really going to cut out the middleman?

The “cash is king who said” is a saying that has been around for centuries. It’s still relevant today, but it’s important to know when you should use cash and when it’s best to use credit cards.

In a recent post, I discussed the importance of understanding company statistics and the distinction between cash and profits. This article discusses how to prepare for cash in a company plan and the factors that influence cash flow. You don’t want to be one of those companies that lose money while making money.

An example of basic cash flow planning Let’s start with a simple example. The first diagram depicts the company from the perspective of money coming in and going out. Sales and profitability are no longer a factor (although sales influences money in and costs and expenses influence money out).

Cash sales, payments from receivables, new loan money, and new investment are your sources of money in this extremely basic business. Buying widgets in cash, paying interest, paying bills when they come due (i.e. paying accounts payable), and repaying loans are all examples of your expenses.

Figure 1: A basic cash flow strategy

Even at this elementary level, you can see the potential for problems and the necessity for a computer to connect the numbers. Accounts receivable estimated revenues must have a logical connection to sales and account receivable balance. Similarly, your payables payments must be related to the payables balances as well as the expenditures and expenses that resulted in the payables. This is as important to a company’s existence as the sales forecast, personnel strategy, or income statement, but it’s not as obvious. The math and financials are more complicated.

An example that is more realistic When dealing with a more realistic company scenario, the cash flow strategy may rapidly become complex. We’ll look at cash flow planning for a startup business in the following diagrams.

Preliminary assumptions We establish the beginning points, which are the anticipated revenue, in Illustrations 2 and 3.

Figure 2: Profit and loss statement 1631530508_166_Cash-Is-King Click to Enlarge Graphic

…as well as the beginning point.

Figure 3: Initial equilibrium 1631530509_765_Cash-Is-King

We’ll look at a basic example of company revenue as a starting point for budgeting. In May, sales peaked. The example already separates sales into cash and credit transactions. We’ve also streamlined salaries and operational costs so we can concentrate on the cash plan rather than the income statement.

Breakdown of cash flow In the following sections, I’ll walk you through the Cash Flow table, row by row, and show you how the figures in your Cash Flow have a direct effect on your Balance Sheet, so you can see how one table affects the other.

We have split a typical Cash Flow table into two parts, Sources of Cash and Uses of Cash, for discussion purposes.

Sources of funds Figure 4 shows a list of potential cash sources for our hypothetical business. The majority of them have an effect on the balance sheet, while a few originate from the income statement. For the time being, we’ll concentrate only on cash flow. After dealing with cash, we’ll take a quick look at the balance sheet’s particular cash flow implications.

Sources of cash (Illustration 4) 1631530510_378_Cash-Is-King Click to Enlarge Graphic

  1. The first row, Cash Sales, is just a guess. To prevent discrepancies, it should be linked to your sales forecast and income statement. Total sales are equivalent to cash sales + credit sales. Credit card transactions are usually bundled with cash purchases since the money is usually received within a day or two. In this instance, cash refers to cash, checks, and credit cards, with the exception of real credit transactions, which are purchases made on terms.
  2. The second row, From Receivables, is an estimate of the amount of money received from customers as account receivable payments.
  3. The final row, From Goods Sale, displays exceptional sales of inventory that occurred outside of regular business hours. A manufacturer, for example, may sell surplus materials or components outside of its normal and established sales channels. This does not include regular sales of normal inventories, which are reported as sales on the income statement.
  4. From Sale of Other Current Assets and From Sale of Capital Assets are the fourth and fifth rows, respectively. Another method to earn cash is to sell current or long-term assets.
  5. The following three rows are where you estimate the amount of fresh borrowed money that will enter the business. The distinction between the three is based on the kind of borrowing and the words. The From New Current Debt row represents money borrowed from traditional lending institutions as regular loans with interest payments. The From New Other Current Liabilities row contains things such as accumulated taxes and accrued salary and wages, which are money due but not officially borrowed. There are usually no interest charges connected with this row. The From Fresh Long-Term Debt row represents new money borrowed over a longer period of time.
  6. Fresh Capital is the final row in the Sources of Cash section, and it represents new money flowing into the business as an investment.

Cash’s Applications The usage of cash in our hypothetical business is shown in Illustration 5.

Uses of currency (Illustration 5) 1631530511_263_Cash-Is-King Click to Enlarge Graphic

  1. Paying Accounts Payable is the first and most apparent use of cash. You owe money, therefore the accounts payable balance is the amount you owe. You pay off the majority of this every month.
  2. Wages, salaries, and other compensation-related payments you make to your workers and the government are recorded in the Payroll etc. row. These commitments aren’t recorded in the accounts payable system. Instead, you pay them on a monthly basis.
  3. Apart from the salaries and such in the row above it, the Immediate Expenditures row is for additional expenses that you pay as they arise. They never wait for their turn in payables.
  4. The Immediate Cost of Sales row is essentially identical to the one above it, with the exception that these are sales costs rather than expenditures that are paid as they are incurred.
  5. The Interest Payments row implies that interest is paid when it is incurred rather than being held in payables to be paid later. As a result, interest payments reduce cash flow. The figures must match those in the revenue statement.
  6. Principal Payments are the following two rows. Principal Payments and Current Debt Long-term debt refers to debt that is being paid back over a long period of time. You lose money when you pay off your debts. There is a regular payment of long-term debt in this case, as well as a single payoff of a portion of the present obligation.
  7. You register new Inventory in Cash on the second row from the bottom. You’ll need to know how much new inventory you’ll be purchasing, so the percentage paid in the same month is included into the new payables calculation.
  8. Finally, acquisitions of New Capital Assets decrease cash and alter the balance sheet amount of linked assets in the final row.

Making a cash balance calculation When you’ve finished with both parts, add the new cash sources and subtract the cash uses to get an anticipated monthly Cash Balance, as illustrated in Illustration 6.

Figure 6: The cash balance 1631530512_37_Cash-Is-King Click to Enlarge Graphic

Even with this comprehensive list, we may have overlooked some additional things that may save money. This example table has no information on the acquisition of current assets. There is no information on the owner’s draw or dividends. Interest income and miscellaneous income do not have their own rows. This is simply a basic example to demonstrate the connections between the various tables and the interdependencies that must be considered when calculating a real cash flow.

Connections to the balance sheet I can’t speak about cash without mentioning the balance sheet’s cash flow. The income statement, cash flow statement, and balance sheet, the three most significant financial statements in a plan, are all connected to each other.

The example balance sheet in Image 7 is connected to the cash flow in the previous illustration. The cash flow affects the majority of the rows on this balance sheet, and they must be updated whenever the cash changes. Let’s take a closer look at the balance sheet to complete the circle.

Figure 7: A related financial sheet 1631530513_315_Cash-Is-King Click to Enlarge Graphic

  1. The Cash Balance row shows how much money you have in your checking account. This is calculated using the cash flow.
  2. Customers owe you money for sales you’ve previously made, which is referred to as Accounts Receivable. With credit sales, the amount rises, and with accounts receivable payments, it falls. The closing balance for each month is the total of the preceding ending amount plus fresh credit sales, minus payments received.
  3. Subtract the prior amount from the direct cost of sales + new inventory purchases to arrive at the inventory balance.
  4. Other Current Assets are equal to the previous balance + new assets bought (with cash) minus assets sold (from sources of cash).
  5. Long-term assets, such as plant and equipment, are known as capital assets. The current month’s balance is equal to the previous month’s balance plus any new assets bought, minus any assets sold.
  6. The value of capital assets diminishes as depreciation accumulates. From the income statement, this month’s balance equals previous month’s balance + fresh depreciation.
  7. Accounts Last month’s balance plus additions (a subset of costs and expenditures) minus payables payments will be payable. New payables will comprise new inventory that was not paid for when it was bought, as well as indirect sales charges that were not paid as they were spent, operational expenditures that were not paid as they were incurred, and other similar things.
  8. The balance of current notes (short-term) will be equal to the previous month’s amount plus fresh borrowing less principal payments. Interest payments are not included since they are accounted for in the income statement and have no bearing on the balance. Cash flow should cover principal payments and additional borrowing.
  9. Other current obligations include items like unpaid taxes and unpaid salaries, which are liabilities you’re aware of but haven’t paid.
  10. Long-term liabilities (debt) rise as you borrow and fall when you repay the loan. The balance will be the previous month’s balance + fresh borrowing as a cash source minus principal payments as a cash use. The March balance indicates a $100 rise for a new loan, minus a $3 reduction for principle payment, resulting in a $376 amount at the end of March, which is precisely $97 higher than the $279 balance at the end of February.
  11. The term “paid-in capital” refers to money that has been invested. The balance should equal the previous month’s balance + fresh cash investment, minus dividends from cash usage.
  12. The accumulated profits that are not distributed as dividends are referred to as retained earnings. This is usually changed once a year, when the yearly financial accounts are produced.
  13. Earnings are the total earnings since the previous year’s conclusion. The balance for this month should be equal to the previous month’s balance plus this month’s profits. Earnings remaining in the company at the end of the year are reclassified as retained earnings after an annual adjustment.

Recognizing cash flow The most important financial component of your company forecasts is your cash strategy. A business plan helps you create a realistic cash projection based on the underlying connections we examined in the previous chapter, if it’s going to be helpful at all. Your cash flow is affected whenever you alter an assumption in a sales forecast, personnel plan, profit and loss statement, or balance sheet.

The following examples demonstrate how cash flow works. Profits are crucial to cash flow; the higher the profits, the greater the cash flow, since profits are sales (which produce cash) minus expenditures and expenses (that cost cash). The effect of balance sheet items is less obvious:

  • Your cash is depleted as your assets grow. A reduction in assets results in a rise in cash.
  • A rise in liabilities results in a rise in cash. Cash is reduced when obligations are reduced.

The effect of receivables, inventories, and payables is ultimately determined by these two principles. Keep in mind that every dollar you have in receivables or inventory as assets is a dollar you don’t have in your cash balance when you look at your cash flow assumptions. Every dollar you have in payables is also a dollar you have in cash. Although the essential effect isn’t as obvious in this basic cash model as it is in the previous chapter’s examples, the arithmetic and financial concepts are the same.

The cash plan is essential, and it is the most important financial analysis in the company plan. It is responsible for managing the cash-to-profit ratio. The cash flow statement sits between the income statement and the balance sheet, connecting the two.

The “cash is king” was said by the American entrepreneur, John D. Rockefeller. Reference: cash is king quote origin.

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Frequently Asked Questions

What is meant by cash is king?

A: In ancient times, kings and queens ruled their kingdoms with money. They would trade land for gold and silver coins as payment to other monarchs. This system made the ruler of a kingdom very powerful because they had so much wealth at their disposal, thus giving them power over everyone else in the country.

Why cash is king right now?

A: The answer to this question is that cash is king because its easier for people to hold and use than credit cards.

Is cash still king in 2021?


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