Tuesday, 29 October 2013

Cash is King.. understanding Cash Flow and Technology SMEs

Two things I found out - one I had been doing far too much management accounting which  I was not getting paid for, and secondly I had invented my own perfect cash flow forecast and analysis spreadsheet for the minutiae of home economics.

This little video sums it up pretty nicely, and I have been through an hour or so on youtube and really this is the deal anyway! ( the business owner looks and sounds a bit like Scarlett Johansson too)

The most interesting issue is that businesses can actually survive with no profitability far longer than they can without cash flow. When the cash in versus cash out is negative when the last bills come to be paid, then technically the patient is dead: the heart has been deprived of blood and dies: the company is bankrupt.

Even whole nations have to be cash flow pedantic- look at the USA recently with the debt ceiling- raising cash for net working capital- is all about cash flow and covering shortfalls in income while there being a lag in being able to reduce costs, in this case mostly defence cuts.

So countries and the EU as a body, need to be able to collect money, pay people and the raise any funds to cover the deficit. Companies can use the same principles of debt rescheduling and raising funds, but both CEOs and politicians are best advised to balance the books as much as they can and for the SME sector then really I believe that putting investment into infrastructurem brand building and enabling or key sellable technologies aside, then companies need to both demonstrate they have positive cash flow based on their gross margin and sales cycle for given periods, while also having the discipline in creating positive cash flow at key period ends.

A lot of technology companies are purely an academic exercise until the point at which they can see income on a monthly basis: This should be clear to investors, they are either investing in nerds in what is essentially a private university, or they are investing in entrepreneurs who can convert nerd hours into cash.