CASH IS KING, SO DON'T TIE IT UP!

In this month’s blog post, DEROTTO will discuss the importance of having liquid cash available for the day-to-day operations of your business. Liquid cash is one of the most important aspects of any business. Liquid cash is a term that has two applicable meanings: cash in your bank account and cash that is available to your business through lines of credit. The amount of liquid cash that your business has readily available, particularly during challenging times, gives your business flexibility. Having flexibility enables your business to adapt to sporadic market conditions; it also grants business owners with the luxury of enough time to respond to conflicts appropriately. Having the ability to make better choices (attributed to liquid cash/flexibility) can be the difference between winning and losing in business.

One of the reasons we’re writing about liquid cash is because too many business owners get caught up in the same cash flow trap—They use liquid cash to acquire hard assets (i.e. equipment) and inevitably end up regretting the decision a month, 6 months, or 1 year in the future. The short term rational behind this decision, (to use liquid cash to acquire hard assets) is that business owners are fixated on the interest rates of borrowing money and nothing else. Now I’m not saying that the interest rate isn’t important, but it shouldn’t be the only variable you consider when it comes to deciding which financing option to use when acquiring equipment. A line of credit will typically have a lower interest rate than a term loan or term lease, but by tying up your liquid cash in a hard asset, you may be jeopardizing your business in the future. Many business owners have good intentions of paying off their line of credit off quickly (when used to purchase equipment), but this often doesn’t come to fruition.

A small percentage of businesses are fortunate to have ample amounts of liquid cash, but most don’t. Managing your capital reserves is one of the most important aspects of running your business.