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If you are managing a professional services organization, then you need a good cash position report.
The cash position is your current and forecasted ‘cash in hand’. The importance of having cash in your bank account may seem obvious, but it cannot be emphasized enough. It is important to understand the difference between cash flow and cash in hand as they are not the same. An organization can have a solid cash flow (which is revenue tied up in receivables), but without money in the bank, it cannot operate. Let me go into this further as it is the foundation of our conversation here.
For any professional services organization, anywhere from 60 to 80 percent of the monthly expenses are tied to employee salaries. Paying salaries on time every month is key to the organization’s credibility. Salaries need to happen on time, month after month, irrespective of your cash flow. They require cash on hand. Besides, any business planning, from HR activities (a team lunch, an offsite meet) to investing in the organization’s growth (new areas of business, developing expertise) also requires cash on hand.
One more topic that I need to mention is the current pandemic. Many projects are delayed, cancelled, or on hold. From a business standpoint, this kind of unforeseen event can put a tremendous strain on a service organization’s ability to continue operations. But while the current pandemic is an extreme scenario, businesses constantly face challenges as we operate on a global level. For other recent examples, consider the 2004 tsunami and the 2008 financial meltdown. Cash on hand can mean the difference between survival and going out of business.