Yep, cash is… The Economics of…

Yep, cash is… Really king

Odd as it may sound you could have two businesses with sales, gross profits and operating costs that are absolutely identical and yet have two entirely different financial pictures. One is vibrant and poised for growth while the other is about to shutter its doors!

The first business has average receivables of 30 days and is sitting pretty. But the other has receivables averaging a distressing 180 days.

Chances are good, that second business will have problems making any sort of payments to anyone for pretty much anything. That would include salaries as well as paying its vendors. Short of the owner dipping into his personal assets there’s no cash to disperse.

There are other reasons (like meteoric growth) to explain how businesses can become cash poor, but in the end all that matters is that cash is an asset that must be managed prudently. Letting receivables get out of hand is often the most common cause of that condition and it’s why we need to stay on top of invoice payments and be diligent about getting paid on time.

That matter aside, having the cash necessary to allow investing in growth first requires careful management of those reserves to invest in it.

Growth aspirations aside, without the reserves resulting from getting paid and paying our obligations in a timely fashion, the numbers on that P&L statement might not mean much.

The Economics of … Money value and us

 

So what’s it worth? That simple question drives all the economies of the world and even the millions of the smallest transactions that occur daily.

What makes dollars, gold, silver, diamonds and even Bitcoin valuable? It’s simply that we all see them as having value as a medium of exchange. But that’s only true when others also see it as valuable too.

Here’s an abstract example: If we dig a hole in the ground, it has no value unless that hole is something someone wants. Back here in the real world this means that if we offer a service or product that’s needed and desired by our customers, it has value.

And because that’s the case they will pay us to enjoy the benefits they promise. Obviously, the opposite is also true if we fall short.

When we propose an idea to a potential buyer, we need to remember its value is exactly proportional to the benefits (attractiveness) it promises. The sizzle of the steak tells our brain that the steak will be delicious. And the words we use to describe the benefits of what we’re proposing must do the same thing for that product.