Why cash is so important for the business?


We have seen or heard about many businesses across the world which once reached their culmination point and earned mammoth profits but still went down as they could not manage their liquidity/cash flows due to one or another reason and unable to honor their obligations towards creditors/lenders. For any business, be it small or big, continuous growth and profits are most admired factors. However, maintaining the sufficient liquidity or healthy cash flows are equally pertinent to save the business from any failures.

The basic principles of tracking and controlling the cash flow in the organization we be discussed as under:

  1. The Length of the Operating Cycle: The operating cycle is an activity which measures the average period of time required for turning the Company’s inventory into cash.In order to assess the working capital requirement, the one has to assess the length of the operating cycle. If a company has a shorter operating cycle and easily converting their stocks into cash in short span of time, then working capital requirement is less and vice versa.
  2. Return on Investment: The second most important factor is the assessment of the profit on the money which the one invests in the business. The analysis of the percentage of profit requires the close observation towards labor cost, material cost, marketing cost etc. Sometimes, the businesses get the cash inflow in a good quantum but not having the idea of cash outflow or expenses can keep the business in myth and create the hassle for the survival of the business in long run.

After the assessment of the aforesaid factors, a business can keep a tab on their cash flows and cash requirements.

Importance of keeping the cash has become more indispensable than taking higher risk in the business as it can fetch much higher returns or you can survive in a slowdown or grab any business opportunities during acceleration if you have enough cash.

There are only two basic means for infusing the funds into any business:

  1. Equity contribution including Profits b) Outside Borrowings;

Having said that, there are thousand different ways of spending the Cash. Therefore, more tracking is required for managing cash outflows.

In the end we can clearly come to the outcome that without the sufficient liquidity of Cash a business cannot survive for long.

Our experts can help you in planning and maintaining healthy cash flows and guide them in improving their leverage and liquidity position so that they can take the informed decisions.

Disclaimer – The above points are based on the personal interpretation and understanding of the RERA rulings, which may differ person to person. The readers are expected to take expert opinion before placing reliance on it.


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