The Importance of Cash!
When most people start a small business, they focus on becoming profitable just as fast as they can.
Nothing wrong with that, I have done it myself.
But strange as it may seem, profit isn’t everything! A business doesn’t fail because it is unprofitable. Companies can run for years without turning a dime in profit.
Take Uber as an example. It loses over a billion dollars every quarter, yet nobody seriously considers that it might fail anytime soon.
Enron lasted for years, showing huge profits which, as it turned out, were produced by way of creative accounting and compliant auditors, but then Enron failed spectacularly when it ran out of something vital.
That something was cash.
Look at Blackberry, the company that effectively invented the smartphone. In its heyday it had a virtual monopoly in smartphones, Blackberry generated vast quantities of cash. I am sure there were pressures to spend that money acquiring other businesses or build a personal computer to take on Microsoft. But they didn’t, they preserved their cash. So then, when Apple and Samsung launched consumer-based smartphones, Blackberry’s market dominance vanished. That was 2013, and Blackberry has lost money ever since, but it is still in business because it still has lots of cash.
What causes businesses to fail?
Businesses don’t fail when they have bad management, or provide poor customer service, or deliver unreliable products. All these factors can contribute to the collapse, but they aren’t the reason for the failure. Companies can totter along with all kinds of problems, except one.
A business fails when it runs out of money!
Uber doesn’t fail because it has plenty of cash. It has lots of money because the financial markets believe in its future and keeps buying shares. Enron kept itself together until it simply ran out of cash. Having no cash is something even creative accountants cannot hide.
It is the same in your business. You can keep going as long as your business generates cash, or you have access to money by borrowing it.
So, pay as much or more attention to your cashflow as you do to profitability.
How to Maximise your cashflow.
Pay bills as late as you can!
Just about every invoice you will receive will contain Terms, probably saying that interest at some rate will be charged after, say 30 days. So why pay it until the 29th day! Keep the money in your pocket as long as you can. Even if you take it beyond the 30-day deadline, most companies will accept your payment if you give them the face value of the invoice, and ignore the interest owed.
Get paid as soon as you can!
You will never get paid before your client receives the invoice. So, it is most definitely in your interest to get it in his hands as soon as you can. With EasyInvoice you can achieve this using your smartphone at the earliest possible opportunity, from your customers’ own office if needed. And don’t put 30 days in your payment terms, clients will readily accept 14 days or even less. Chase them up if that deadline passes without payment.
Rent, don’t buy it!
Preserve your starting capital as long as you can by renting or leasing major cost items. That way, the monthly rental more closely matches income from sales. Rent premises for your business, or work from home as long as you can. Don’t purchase or sign a long-term lease because it is hard to predict how successful you might become, and you would be left with an expensive mistake.
Borrow money before you need it!
Sounds daft, I know. But most businesses are seasonal or operate to their own periodic rhythms. From experience, most clients pretty well shut down their payables function in the middle of December and don’t start sending checks until halfway through January. Similarly, summer can be an arid period for receiving payments due to holidays in their client accounting functions.
But meanwhile you still need to keep employees (or yourself) in funds, the rent paid, and the lights on.
You will probably need to negotiate a line of credit from your bank to tide the business over the dry spells. Banks are extremely risk averse. An insider joke is that Banks will only loan money to those who can prove they don’t really need it!
Apply for your line of credit, mortgage or whatever when times are good. Do not wait until you need cash from a bank to meet a short-term crisis, like making payroll or paying taxes. It is humiliating, and they may make you pay a steep price for the loan.
Pay close attention to your cash position. It is vital. Pay bills as late as you can, press early for payment from clients. Establish a line of credit before you need it.