Skip to 0 minutes and 3 secondsThere's a saying in business that sales are vanity, profit is sanity, but cash is reality. When we see reports in the news that a business has made a profit or a loss, they are talking about an accounting concept. The profit is defined as the income from sales of the products or services the business is selling minus the costs of running the business. It is likely, however, that your bank manager is far more interested in something else-- how much money do you have in your bank account? And that number depends on something we call the cash cycle. In business we have something called the cash cycle, which measures how quickly cash comes into and out of the business.

Skip to 0 minutes and 50 secondsThis is very important when the business commences, as the owner will need to pay out cash before receiving some coming in. Think about it. If you are setting up a business producing and selling clothes, you will need to-- buy or rent a factory to produce the merchandise, purchase the machinery that manufactures the clothes, employ staff and pay them, design the clothes, buy materials from suppliers, pay insurance, electricity, and other overheads, advertise and market your goods and then sell them. Even if you have sold the clothes, if you are selling to retail customers they are likely to demand credit, so you will have to wait further before any cash comes into the business.

Skip to 1 minute and 34 secondsThe reason it is called a cash cycle is that the cash from sales allows the business to buy more materials, pay wages and overheads, and therefore produce more goods to generate more sales. These sales can then pay for more materials, wages, and overheads, and so on. Managing the cash cycle is a juggling act for the business owner. He or she will have to have sufficient money at the start of the business to cope with all these cash demands before anything comes in from sales. Get this wrong and the business will go bust before it is up and running. Most people who set up in business do it because they have a product or service that they have a passion for.

Skip to 2 minutes and 20 secondsThe last thing they want to do is to spend time managing cash. And this is why they may need someone with financial knowledge to help in the business.

The importance of cash to business

In this video we’ll see that cash and profit are not the same thing, and that cash is king for any successful business or organisation.

Profit is an important accounting concept, often defined as Profit = Sales - Costs. But as Peter explains, profit isn’t the same thing as money in the bank.

In this video you will learn about the cash cycle. The cash cycle measures how quickly money comes into and out of a business. You will see that careful management of this cycle is critical for the survival of any business or organisation.

What’s next?

In the next few steps of the course we’ll look in more detail at how important cash flow is to the survival of a new business by walking you through a few examples.

Share this video:

This video is from the free online course:

The Importance of Money in Business

University of Leeds