The importance of having the right cash resources
When people think about cash, they usually think about cash flow. I want to get you thinking about cash resources. There is a real and important difference.
I am talking about your pool of cash – do you have access to sufficient cash to maximise your business opportunities? Could you grow more quickly if you had more cash? If the answer is yes, you are under-funded. You have a built-in growth inhibitor in your business. You are banging your head against a particularly hard brick wall.
If that’s you and if growth is one of your objectives, then we should set out on a journey together to find you some more cash.
There are only two sources of cash:
As regards equity, there are three broad sources:
1. You personally inject cash into the business (e.g. leverage the family home)
2. You generate it via business profitability which might be a slow path
3. You take money from a third party who is now an owner of the business
If none of those things holds any appeal, you should be thinking about debt.
Now, most of us have some long-held beliefs about debt. My early views were coloured by my parents’ fear that debt was a sign that you were living beyond your means. Though, they did have a mortgage so they did recognise what some people call ‘good debt’ and their fear was related to what would then be termed ‘bad debt’.
What that essentially boils down to is that they were risk averse and debt is seen as risky. Yet, in my view, not having enough debt is perhaps even more risky. If you have no debt, you are 100% equity funded. That is, you are taking all the risk. You are not sharing it with anyone.
Secondly, if you don’t have enough debt, and if that limits scale because growth is slow, your margin for error1 is probably pretty slim.
So, make a conscious decision about debt. How much is enough? Where are you comfortable? Maybe you don’t have enough debt? Maybe a lack of debt means that your cash pool is forever running dry? Maybe you could just do more if you had more.
This is how quickly cash returns in your business. Meaning that typically, you spend money to make money. You pay rent, wages, the cost of your manufacturing inputs; you produce your product or service, you sell it and you wait to get paid. That’s cash flow.
Cash flow is of critical importance. It’s important because it either eats into or replenishes and ultimately grows your pool of cash. And your pool of cash is a determining factor in your rate of growth.
So, I hope you can see the difference between cash resources and cash flow, and I hope I made you think. If you want help working through this type of exercise for your business, we’re pretty familiar with it and we would be delighted to help.
For what we call ‘investable’ or ‘backable’ businesses, we can help you access more cash resources, be it debt or equity. For others, we can help you to become investable or backable.
So, don’t hesitate to pick up the phone and talk to us today on 1300 656 141.
1 In this context, your margin for error is how many things would need to go wrong to cause you a big problem? e.g. your best client leaves – what % of your profit does that fee represent?