Money in the bank is like oil in the car.
Certainly, you have many ways you are pulled every day, both tactical and strategic. But when money is the issue, your time, energy and focus are drained from other important areas of your life or business.
Running out of money is not always synonymous with “going broke”. Many great businesses in their growth periods find themselves stretched for cash. If fixed expenses, especially payroll, are paid out before cash is received from services or shipments, the company is financing its growth with ever-increasing working capital needs. Without remaining availability from a bank line, many businesses are stretched to the limit just when they seem to be doing better than ever. This is one interpretation of “It takes money to make money”, although that statement was probably created to describe new investment opportunities.
Speaking of which, those companies with cash in the bank and cash available are the ones to scoop up the bargains, from suppliers and in acquisitions especially during tough times.
And oil is a lubricant…
But the most important lesson to remember is that cash is the great lubricant for
[Email readers, continue here…] I find it a great thrill to consult to companies and their senior management when they have plenty of “firepower” (extra cash beyond needs) for acquisitions and strategic initiatives. It seems that the first subject that comes up in such assignments is the health of the competition. Such bargains; so little time.
Cash and the value of your business
Running out of cash denigrates the very value of a business, reducing greatly any bargaining power with suppliers or acquirers. A company that otherwise might be valued at twice book value, 1x revenues, or 10 times earnings will be valued at a lower amount by potential acquirers knowing that the company shareholders are in a tough position and management hungry for leverage and a little more sleep at night.
Never run out of money, even at the expense of slowing growth for a time. A fast-growing but undercapitalized company is not highly valued in an acquisition. For early stage businesses worrying over dilution when faced with an offer of more money than they need, the professional advice is most often to take the money and suffer the dilution because the money may not be available if needed later.
Cash is such a powerful inhibitor or driver of growth that management of the corporate cash is as important as strategic vision, and perhaps over time a good indication of the success of that vision to drive profits.
Yes, I totally agree with what you said. I think that it’s very important not to get out of money when running a business to avoid issues. Thanks for sharing this article.
Yes,I totally are with what you said. I think that it’s very important that the business won’t get out of cash. I think that if it happen it will have a bad impact to business. We should handle our business finances well. Thanks for sharing this article.
I recall reading a book when I first started my company that addressed this, and throughout the 15 years I ran the company prior to selling it, a few words from that book were always in my head. The phrase the author used was “growing broke”, meaning of course growing without the firepower (oil) to make the people investments necessary to handle the growth. That always stuck with me. Check your wallet: invest if it’s fat, wait if it’s not.
It’s a good article Dave, thanks for posting it.
I recall reading that Bill Gates, when Microsoft was young, demanded company always have a year of cash needs in the bank. Of course, software development is people intensive, rather than capital equipment intensive.