Cash is King!
Tim Sparrow, MD of BBB Investments shares the reasons why cash is king.
As someone with a strong Sales background, this subject might not seem the most obvious for me to choose, I will attempt to explain why?
TV shows like ‘The Apprentice’ generally give the impression that “having a good product” and “being good at pitching”, provides all you need to start a successful business, neglecting many other critical areas, funding & cash-flow being the most central of all!
A very rich & powerful business associate in Germany once gave me this important lesson, “in the life of a business SALES have the importance of FOOD and PROFIT has the importance WATER however CASH has the importance of OXYGEN”
Naturally all 3 things are hugely important however cash-flow is the single most important when starting-up & building a new business, if it is to have a sustainable future?
When businesses sadly fail, they often still have ongoing sales which are still being made at a profit however they lack the necessary CASH (CASH-FLOW) to be able to pay wages, suppliers, running costs, stock-replenishment or other things which enable them to continue to operate.
When businesses struggle to meet sales & profit targets, provided they have cash reserves they can still ‘live on’, taking corrective actions, towards reducing costs, increasing sales, increasing margin or generally revising plans. Many highly successful businesses struggle within the early years, this is nothing new or rare and should not be viewed as a sign of weakness or failure.
Actually the opposite is true, your funding plans need to “expect the unexpected” and allow for this, aiming for a clear ‘Plan A’ with a fall-back position providing a safety buffer if you fall below plan or even exceed plan, both of which will put different strains on cash-flow projections!
Of equal importance is to keep borrowing to a minimum cost in terms of interest which will place further pressure on your business however it is a common mistake to “save money by borrowing too little”, often funding can be found via family members, local business contacts or government schemes, with a little hard-work and pro-activity at the beginning.
A dynamic cash-flow model which takes account of the ever-changing situation as the business takes shape will also give you guidance and ‘early warning’ to assist you in making good decisions.