Cash is king
How to manage your cash
Dear reader,
many start-up businesses struggle with the cash at hand. Even developed businesses are not yet focussing on their cash balance well enough. I have seen it often, and recently again several times: In times of crisis the lack of cash is forcing the business into insolvency. It happens easily, if the leadership is not focussing on cash from the very beginning and all the time. And it happens fast.
Here are some suggestions for you how to manage your cash:
When you grow your business not only look at revenues but look very carefully to collect the cash and safe enough of it.
Some businesses look at EBITDA as a success indicator. That is not enough. Even if EBITDA approximately equals the cash coming in you need to manage your cash separately (for instance if you by some assets you need to running your business the cash is going out - this outgoing amount is not shown in your EBITDA!)
Some businesses calculate their cash position on the basis of their profit & loss, and balance sheet. This is not recommended. You need to calculate your cash in-and-out separately, in a separate report.
Safe as much cash as you can for times of lower revenues, or for times of crisis (a crisis can be internally, or externally driven). How much cash should you safe?
Bill Gates reportedly said that he wanted at all times to have enough cash at hand to be able to pay salaries for all employees for 12 months!
Mostly people raise their eyebrows when I say this. They argue like: Well, its better to have leverage in the business and not too much cash.
I strongly disagree. Cash is king and only cash can safe you if things go not well. And in any business development there are times when things do not go as planned.
Warren Buffet now has almost 300bn USD in cash, or liquid assets. The Economist is arguing that he should not hold so much cash with a lot of sophisticated arguments.
I strongly disagree. Think about it. Warren Buffet has principles. One of them is: Never ever do something which would risk the whole of the business. If we should enter into a next financial crisis then he is the one who will still sleep well. He will then be able to buy good businesses at reduced prices (because of the financial downturn).
For small businesses with strong growth and profitability there will come the moment of tax paying. Many small businesses do not plan well for this moment and lack the cash to pay the taxes. Another reason to safe as much cash as you can.
The question is: How much cash should you have at all times? Which amount is appropriate for your type of business?
I would love to read your thoughts about this.
Warm greetings,
Alexander