Why Every Business Owner Needs To Know Their Cash Balance?  

Riann Umaga-Marshall Business Strategy & Planning, Managing Cash


What is my cash balance +/- 10% at any time?

Knowing your numbers at all times isn’t simply to ensure you have enough cash to pay your bills (although that is important). Having this information daily ensures you are keeping track of your numbers and what is important to keep the business ticking over smoothly. This also demonstrates to your team that the numbers matter and vital to the success of the business.

Knowing and understanding your cash balance gives you an insight into what else is going on in the business. Yes, this sounds very basic but it really can give you some key information about your business. Your leadership team should be able to tell you this number daily and if you are the leadership team you should know how to get it quickly.

There are 4 key areas that knowing your cash balance opens up to you:

  1. What is happening with my sales?

The number one figure that feeds into this cash balance is cash sales. Knowing your cash balance helps you understand the effects of the number of sales you are making on credit as opposed to cash. You may then ask ‘What does the value of cash sales mean for your cash cycle and the type of customer you service?’ This then leads on to the next key area.

  1. What is my collection period (credit sales)?

You want to understand your collection times and what this means for your cash balance. For example, when you make a big sale on credit what does this mean for your cash flow and your cash balance? When is this cash likely to be collected and can our working capital support this or will we need to tighten our credit policies or require extra short term funding? You want to know what amount of receivables you should be collecting now and see in our cash balance the next day. Businesses that perform well know that making the sale is only part of the process and collecting on that sale is important if not more so.

  1. What are my expenditures?

Knowing your cash balance also brings awareness to your daily expenditures. These may be day to day operational expenses or even bigger capital expenses with down payments going out. The daily/weekly movement of your cash balance can highlight things like ‘Are we spending too much on unnecessary items?’  Having a focus on how much is going out of the business on a day to day basis you are less likely to spend unnecessarily.

Many businesses we see get into trouble when right out of the gates they are spending cash on items that are not needed for the operation of the business and no one is overviewing this. Older more established businesses also get into trouble here where things have become too comfortable and the reigns have loosened up and expenditures are getting out of control. Knowing your numbers doesn’t mean you will shut down this type of spending but it simply brings awareness that it is happening.

  1. Lastly, how much debt are we servicing?

Knowing your cash balance also makes you look into what debt you need to service and when. Very basic stuff but if we don’t know our cash balance at the time we need to service our debt then it can be too late to make alternative arrangements. Being prepared and aware of when the payments are due and do we have the cash to support it is key to staying clear of defaulting on your commitments.

Knowing your cash balance and having a strategy for this balance is invaluable to your business. Aside from the 4 vital figures mentioned above it allows you to create a tangible goal which can create good cash management habits for yourself and the team you lead. A goal can be ‘Maintaining a specific balance over time’ for example. Having this goal in mind tends to temper spending and keep you and your team positive, motivated and focused on what is necessary as opposed to a budget that is seen in a more negative view. Your cash balance works as a scorecard for your business and as such keeps you on track for success.