We often hear that ‘cash is king’ but what does it really mean for a business? Fundamentally, it means that focusing on the cashflows of a business is the best way to manage its operations. It allows the business to use cash to drive growth and avoid cash being tied up unnecessarily where it cannot be used for growth.

Accruals-based accounting does not give us immediate visibility of cashflows. It books revenues and costs at the time they occur rather than the time when cash changes hands. When you add in other non-cash transactions, e.g. depreciation, the income statement can start to look very different from a net movement in cash position. A company can book an accounting profit while losing cash in the same period. This can limit the ability for management to spend money on growth-related activities (product development, key hires, advertising and marketing etc) as there may be not be enough cash in the bank to undertake such expenditures.

The cash trap

We use the term ‘cash trap’ to refer to areas of the business where money is tied up in non-growth orientated ways. There are a surprising number of areas where cash can be unnecessarily tied up in these cash traps.

There has been a lot of focus in strategic management circles with the ‘cash conversion cycle’ (or the ‘working capital cycle’). This is where cash is tied up in inventory, or is inefficiently used in long client payment terms and short supplier payment terms. The net impact of these elements traps cash in working capital and away from growth-orientated activities.

However, large pools of cash can be inefficiently tied up in a business in other ways. Unnecessary capital expenditure can take up huge amounts of cash. This is why understanding the free cash flow (‘FCF’) of a business is key. This takes into consideration cash generated from operating activities as well as cash tied up with working capital and capital expenditures. Increasing the FCF of a business allows it to free up cash to continuously reinvest for growth, distribute to owners or pay down debts.

Devices-as-a-Service as a free cash flow enabler

Purchasing laptops and phones is a cash trap. It ties up large sums of cash over the long term; cash that could be better reinvested for growing the business. Device rentals represents the most cash efficient method possible to have access to all the phones and laptops a business needs. This removes large one-off expenditures with their detrimental effect on FCF and instead replaces it with far lower monthly costs. This has the effect of improving the FCF of a business and ultimately placing more cash in the hands of business owners to do what they do best: deploy for growth.