A high cash balance lowers the risks and profits while a low cash balance increases profits and risks. There are many ways to increase your cash flow so you can invest that cash to increase your profits.
It sometimes feels like there’s a tension between profits and cash flow. You must strike a balance between the two.
Investing all your cash in business assets, and even borrowing money to invest in business assets, increases your returns but also increases your risk of running out of cash. In that scenario, you have low cash but high profits and risk. On the other hand, having lots of cash means your risk of bankruptcy is low, but your earnings are likely low, too. Owners may not be happy with the return they are getting from their investment in the company.
Decide the balance that's right for you and how to get there. The right balance for you may change during the year or during a business/economic cycle.
There are many ways to increase your cash flow so you can invest that cash to increase your profits or reduce your risk.
I wish you cash balances that are the right balance between profit and risk. I wish you well.
- Rob Stephens
CFO Perspective Resources
Get all the CFO Perspective resources with a FAST (Finance and Strategy Toolkit) membership.