DEMYSTIFYING THE BALANCE SHEET - Understanding the Importance of Cash.

Welcome to the final blog, in this sales training series on Demystifying the Balance Sheet.

If you are new to our blog – thank you for joining us – it’s great to have you here.

You can read previous blogs at our blog page: https://www.castcommercialacumentraining.blog/blog

A new training series to examine and understand the Income Statement (aka Profit and Loss Account) will begin on Monday 10th April.

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Today's blog focuses on the importance of cash.

Cash is the lifeblood of a business.

A business needs to generate enough cash from its trading activities so that it can pay its bills and have enough left over to invest in its infrastructure (tangible assets), pay dividends to investors, repay debt to lenders and finance growth opportunities.

There are four main ways a business can improve or generate cashflow:

• Increase revenue by selling more products and services.

• Reduce costs e.g., by becoming more efficient or reducing non-essential spending.

• Take out loans or use credit.

• Invested capital by new or existing shareholders.

Profit is not cash

Often, salespeople confuse terminology and interchange the terms profit and cash, or profit and money. It is important point to note that profit is not cash, and it’s not money.

As a good friend once said to me...

‘you can’t go to your local supermarket and buy your groceries with profit.’

A company may be profitable, but if it does not have enough cash to pay its bills, it will not survive. We will discuss profit in detail in a later blog.

To help you start to improve your use of financial terminology, memorise this saying,

• Revenue is vanity.

• Profit is sanity.

• Cash is reality (or cash is king)

This is saying is important in sales because:

EVERYTHING you sell to your customers will have an impact on revenue, profit, and cash.

So, whenever you are talking to executive buyers, remember to share with them how your product or service helps their business to increase revenue, reduce costs, improve profit, and optimise cash. If you are unsure ask the executive buyer, in the moment, ‘how does our product or service bring more efficiency and effectiveness to your business?’ After they respond, ask how much in they think it will reduce costs, improve profit, and increase cash. Then ask, how could their business use this cash to support the business?

What type of asset is cash?

Cash is classified as a current asset.

Remember, a current asset is a short-term asset that is cash or can be turned into cash within 12 months. This is why cash is classified as a current asset.

The cash number you see in a balance sheet refers to the balance it has in notes, coins, and money in its bank account.

Here’s how to do a quick and dirty review...for cash.

Before you start the quick and dirty (Q&D) review, ask yourself, why am I interesting in knowing if a customer has a positive cash balance? What does it mean and show? Does it affect your approach or relationship? What if the company is in overdraft? Is that a bad thing, or an opportunity? Does it make a difference to how you engage with them? If so, why? If not, why not?

Here are the steps in order for the Q&D review:

Step 1

Download the financial statements for one of your favourite customers. From the contents page, turn to the balance sheet. If possible, I would recommend using the same customer’s balance sheet as you did for your review in our last blog as it helps to build familiarity and understanding of your customers business.

Step 2

Scroll down to current assets until you find the word 'cash' – see image 1.

Image 1.

If there is no cash balance showing in current assets, it is possible the company has an overdraft, in which case check current liabilities.

Step 3

To start and complete your Q&D review for accounts receivable, answer the following four questions:

i. Compare the current year cash balance with the prior year. Ask yourself, has the cash balance gone up, gone down, or stayed close to the same? Make a note of the movement.

ii. What can you hypothesize about the movement.

If it’s gone up, what could this mean? Here’s a few ideas to consider:

- The company’s sales revenue increased indicating they are selling more products or services.

- The company is collecting its cash quicker from customers.

- The company is focusing on reducing costs and driving efficiency.

- The company taken out new loans. Check non-current liabilities to confirm.

Similarly, if cash has gone down or stayed close to the same, what could the reasons be for this?

- Is the company now a bigger business, so its running costs have increased?

- Are there any problems with debt collection?

- Has the company made any large cash investments. If so, where? And why?

- The company paid a large dividend in the year, compared to previous years?

- The company has repaid debt or is refinancing. If so, why?

Remember - You don’t need to have the exact answers, you just need to be curious about ‘why’ the movement could have happened, and brainstorm ideas to explore further.

iii. What questions could you ask your customer based upon your hypothesis and ideas to learn more about their business?

iv. Finally, based upon your hypothesis and questions, how could your products or services help your customer?

So, how long should this Q&D review take?

The first time you do an cash review, it’s likely to be clunky, bumpy, and slow. Allow 20 minutes. With repetition, you will be able to do the review in just 5 minutes.

It’s now time to practice and play...

Repetition is mastery of all skill...so practice! practice! practice!

Download the financial statements for your top five favourite customers, who businesses you are familiar with. Then play and practice each of the above steps. Using your top five customers will mean you can apply the above steps to five different businesses. This will give you different perspectives, different questions, new insights, and fast track to mastery.

Again, remember to trust your instincts...

When doing a Q&D review remember to trust your instincts. If something doesn’t feel right, or doesn’t make sense, you are probably right. Make a note of it and ask your customer questions about it. Use it as an opportunity to learn more about their business. Curiosity is key, and they will love your interest in them and their business.

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