If you Measure Nothing Else, Measure This
Cash really is king
I often get asked what matters most when your running a start up or a small business, and the answer to that is everything(!)
But the one thing that no start up, or any business for that matter, can survive without is cold, hard cash.
So today I thought we’d look a little at why it’s so important to key an eye on the bank balance — and why it is, that cash, really is king.
If you’ve ever woken up sweating over how you’re going to make payroll this month. Or what you’re going to tell a supplier when you realise you don’t have the funds to settle their bill. Then this is for you.
And if you haven’t, hopefully reading this will make sure you never have to.
My dad drilled into me — if you earn a pound, and you spend a pound and a penny, that way lies misery. If you earn a pound and spend ninety nine pence, you’ll be a happy man.
Sage advice for sure, but for businesses, whilst the philosophy still stands true, there are many factors that come into play and a penny can become thruppence whilst a pound may shrink to nothing.
There are lots of metrics that are worthy of tracking, whether your life time value or your engagement, your recurring revenue or your delivery cost.
But if you measure nothing else, measuring this one thing will ensure that those sleepless nights are kept at bay.
There’s a reason they say cash is king — here are a few of the key reasons you should measure it.
Accounting is a bit like painting by numbers
If you’ve read any of my writing, you’ll know I’m a huge advocate for all business leaders to understand how to read their financial statements, so if you don’t — definitely brush up.
But in the mean time, one of the things that throws a lot of people who don’t understand the basics is the concept of timing differences.
This is the way items can appear in your income statement (P&L to the old schoolers), but not actually reflect what’s going on in your bank balance.
Take the example of purchasing a laptop. You may well choose to take it your balance sheet by way of capitalising it and then expensing depreciation to your income statement over a period of years.
Simply put, the cash impact happened today but the full impact on your profit might not be seen for a few years.
And it’s not just physical items that can be capitalised, it may be a product you’ve been building or content you’ve been writing.
Then there are things like deposits or advances or prepayments or accrued liabilities. The way these impact your cash is different to the way they impact your income statement.
And as importantly, when they impact your cash will also differ.
So measuring your cash is like a sanity check against your income statement, if you’ve got large cash balances but high expenses, chances are that there’s going to be money you’re going to be spending soon.
Equally, if you’re running low but are showing heaps of revenue, then it probably means that people owe you some money.
Cash is reality, it helps you plan your next moves.
It can tell you when something is amiss
As I mention above, there are times when your cash balance will seem at odds with your income statement and that’s pretty normal in business.
But depending on what sort of differences are thrown up, it may be a sign that you need to dig a little deeper.
I’ve seen companies where people have messed around with the inventory (typically inflating it) to show higher profitability, so even though the company seemed to be making heaps of profit, the bank balance showed a completely different picture.
Picking up on these sort of issues well enough in advance may help identify if you’ve got a small problem (like a simple error) or there’s something else going on — like fraud.
Are you really Lean?
At its heart, lean methodology (whether on the famous production lines at Toyota or out by the Silicon Roundabout in East London) is all about efficiency and reducing waste.
Lean startups, especially, focus on incremental change after tight feedback loops. These should be achieved with as little spend as possible.
Because if your startup is truly lean, then you want to preserve as much cash as you can until you find your product / market fit, and only then start spending.
The worst kind of startups are those that get their hands on some money and start renting swanky office space, or hiring extraneous personnel — it’s like the object of the business was getting the funding and then burning it as quickly as possible, not building the business.
It builds trust
Whether you are being funded by family, friends, angels, venture capitalists or banks, if it turns out their cash disappears too quickly because you weren’t paying attention, it’s not going to go down too well.
These folks have put their money, and just as importantly, their trust into your business and you — do them the courtesy of not abusing that trust through neglect.
Peace of mind
Like I said right at the beginning, one of the main reasons to watch your cash when you’re a start up or small business is simply to give yourself the peace of mind that you can meet your obligations.
Or at the very least see the warning signs if you’re going to struggle to do so and figure out how to deal with that — maybe through raising additional finance, or negotiating with your suppliers.
Knowing how much you’ve got in the bank and how long it’s going to last you is the closest you can get to a sanity check in business.
And if you haven’t been measuring it closely yet, now would be a good time to start!