Cash: the vital element

No strategy will succeed if cash flows are not understood and managed, the bluntest example being that if you run out of cash, you will be bust before the strategy is achieved!

Financial strategies can be envisioned from a cash perspective and indeed often an inherent characteristic of the entrepreneur is to think of his or her strategy in the form of a 'making money' model. Generating and expending funds requires strategic management as all aspects of finance are connected by cash at one time or another.

Links between cash and financial strategy

Cash - at the heart of any business - the lifeblood of the business. It is the asset that oils the wheels of trade, the asset that allows investment which will deliver returns and further cash generation in the future. All financial strategies will involve cash flows at some stage. Strategy cannot be delivered without cash, starting with the raising of funds, then the generation of cash from operating activities, then further investment with return of cash to investors, normally by way of dividends. There is also the possibility of, perhaps significant, cash flows from the appreciation in value of non-current tangible assets, for example property appreciating in value and being sold. Can executives be obsessed with cash? A silly and dangerous question to ask, as if there is no cash generation and reservoir then a business will decline if not go bust. However, there are many large entities that sit on cash and at the time of writing (2014) it is reckoned that there are trillions of dollars of cash in company balance sheets. Better safely there than wasted on poor investment, but the return made on the cash is derisory. The obvious answer is to return the cash to the shareholders, either as dividend or as share/stock buy-backs - but what does this say of the executives? Where is their entrepreneurial spirit, which they are paid to utilize to shareholders' advantage?

No strategy will succeed if cash flows are not understood and managed.

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