Cash is king - why? There have been lots of profitable businesses that fail because they don't have the cash. Cash is the lifeblood of the business - it's what keeps you solvent, it's how you pay your debts and your employees. Without the cash you're unable to pay your debts and raise finance, so when people look into a business, they really look into the cash position. Once they're satisfied with that, they'll look at the profitability.
How to manage cash. The first thing is to do a cash flow statement, which is a summary of the money coming in and going out of a business over a specific period. You should prepare that on a regular basis, going over 12 months and updating it monthly. Any basic business software will have a cash-flow statement function, so either you do it yourself, or engage an accountant or book-keeper. The statement will show you where you could have difficulties.
Should I have a cash buffer? Some people like to have a buffer and that's fine, but keep in mind it's actually tied-up money which could otherwise be used for investing in the business. So while you need to be cash-flow positive, having too much money sitting around doing nothing is negative as well.
What to do in the case of a cash squeeze? A lot of businesses are doing it tough on cash flow. Many are not very good at chasing up debtors, but you have to make that a normal part of your business. Another thing is to look at your stock - do you have too much sitting on the floor, which is actually cash tied up? If so, try and sell some maybe through discounting or promotions. Look at other assets of the business; are some of those surplus to the requirements? If they are, see if you can sell them.
Gavan Ord is business policy adviser for accounting industry body CPA Australia.