Understanding your cash position in 3 steps

Just like all countries on earth belong to a continent, your entire cash position relates to just 3 factors.

Arguably the biggest challenge you face when trying to understand your current cash position is that there are likely hundreds, if not thousands of factors that can impact your cash position.

Enter taxonomy. Taxonomy is the scientific study of naming, defining and classifying groups of biological organisms based on shared characteristics. This way of using hierarchical classifications allows us to zoom out and zoom in very quickly as we can classify groups within larger groups.

An example of a taxonomy and hierarchical classification is the map of Earth. The hierarchical classification is as follows:

Earth > Continents > Countries > Cities 

There are over 10,000 cities in the world, however every city is within a country which is within a continent.

When conducting an analysis, an understanding of taxonomy and hierarchical classification allows you to zoom out and zoom in very quickly. For example if you were asked to guess the name of a city with a limited number of questions, you could narrow it down very quickly just by asking which country the city is in.

The 3 continents of cash

• Profit
• Working Capital
• Non-current items

All cash flow relates to all 3 and all 3 are needed for great cash flow.

Profit

The most well-known and biggest continent, is of course profit. If revenue does not exceed costs, your cash position will suffer. With that said, profit does not always equal cash and that is because of the other two continents of cash.

Working Capital

Working capital includes debtors, inventory and creditors. Quite simply if you’re profitable but your customers don’t pay you on time and/or you are purchasing a lot of stock, then your cash position will suffer. Conversely your cash position will appear healthier then it is if you are not paying your creditors (ie the tax office).

Non-Current items

Non current items include balance sheet items that last more than 12 months such as long term loans, asset purchases and drawings. If you’re profitable and your customers pay you on time but you’ve taken out significant loans to purchase assets then your cash position will suffer.

All cash flow relates to all 3 and all 3 are needed for great cash flow.

If you’re not happy with your current cash position, then 1 more of the above items is not functioning at optimal levels. Of course as we zoom in we may find that a specific factor within a specific continent of cash is the leading cause of distress, however it’s infinitely more difficult to be able to zoom in and have context over what we’ve zoomed in on if we can’t zoom out. 

If you would like to understand your current cash position or increase your cash flow moving forward, please contact Hailston + Co on 02 4601 1000.