You have heard the saying before, “Cash is King!” A friend of mine used to tell business owners they need to know how much money they have in the bank everyday. While this is good advice, I think many business owners focus too much on cash and not the business activities that bring in or use cash.

Every time I teach an Introduction to Financial Accounting class I start out by asking the students if they believe that Cash is King. Most of the time everyone in the room will nod their heads in agreement. Then I tell them that I disagree that Cash is King. They give me a “What are you talking about?” look.

Cash is important. But many business owners do not look at their overall business to understand why their cash position is what it is. For example, I met a business owner who told me that his debt was increasing, his inventory was not moving and he did not understand how this could be happening as he had a decent cash balance in his checking account.

I reviewed his financial statements and performed a few ratios in order to show him the how and why of his predicament. One of the things he had been doing was making purchases with credit cards when he had made those same purchases in the past with cash, thereby increasing his debt. Another was that he was making the minimum payments to his vendors for inventory items, again, creating more debt.

His inventory was moving slowly because his main vendor was not sending him large shipments because his debt ratio was getting too high. Since his business depended on repeat customers who would return to see the “new” items, customers were not returning as often since there was not anything new on display.

Sometimes we know in our minds that something is not quite right, but we do it anyway. This was the case with this business owner. He knew he was incurring debt, but he was not using his Balance Sheet so he did not see how much it was increasing each month. Same with the decrease in sales due to stale inventory. If he has been reviewing his Income Statement he would have seen a slow down in sales. Which would have encouraged him to make larger payments to his main vendor for more inventory. He did initiate a customer rewards program, but the increase in sales remained slow in part to no new inventory.

So, while cash is very important, so are the other financial statements (i.e., Income Statement and Balance Sheet). The Income Statement, Balance Sheet and Statement of Cash Flows (i.e., cash position) should be used together in analyzing your business. I recommend that you ask your bookkeeper to prepare and return your financial statements to you for review within 15 days of month end. The sooner you see your past month results, the quicker you can make changes during the current month as well as future months.