Cash quality refers to the reliability and sustainability of business cash flows from profits, indicating its ability to build cash reserves from core operations.
Primary Implication
Your Cash Quality is a function of your profitability. A business returning more than it spends has some Cash Quality. This means after they pay the direct costs associated with a sale, there is money left over to pay their overhead and leave ownership a profit. The size of that profit is proportionate to the quality of the cash being generated.
High cash quality is a function of a well-managed business. Poor cash quality is a business that is failing to hold onto its cash. They are likely trading one dollar in the cost of sales for something less than four quarters. Do this for too long, and you will have no cash to fund your business operations.
Overview
Nothing good in business is sustainable unless you consistently make the money you should. Businesses with poor cash quality are typically businesses with high sales and low profitability. Any business trading the equivalent of a dollar for four quarters is a business that’s break-even at best. Business owners in this position are either continuously anxious about cash or clueless.
Cash quality only matters if you are collecting the cash owed to you. You can’t start managing your business for profit if you don’t stay on top of collecting the money owed to you. The velocity of cash flowing through your business is the most urgent business need when your customers are late paying you, but not the most important.
While your accrual-based P&L Statement will record every sale you made, this is of no value to you until your bank statement reflects the cash received from the payment for that sale. Step 1 of the BusinessCPR™ Management System starts with collecting the monies owed to you promptly. Step 2 bridges improving cash velocity from Step 1 and confirming cash quality in Step 3.