Cash May Be King But It’s Still Your Kingdom: How To Use Cash to Your Advantage
Many Americans dream of the day they can own their own business and be their own boss. The entrepreneurial drive is alive and well, with an average of 600,000 businesses launched in the U.S. every year.
Starting a small business is incredibly exciting. And with proper planning and patient, expert execution, you can ensure that your launch is the start of something long-lasting and not just another flash in the pan. The good news is, according to the Small Business Administration, about half of all new businesses survive at least five years and a full third survive ten years or more.
What’s the key to launching and running a durable business? In a recent article on why some small-business start-ups have such a hard time reaching their five-year anniversary, author Patricia Schaefer outlines seven pitfalls that typically hinder the longevity of a new business:
•Starting your business for the wrong reasons
•Lack of planning
There’s a lot of variables on that list, and I’d like to focus on capital and cash and how you can better manage both and use them to your advantage.
Four things to consider when thinking about your business and cash
•Cash is king. When starting a small business, the reason cash is king is because it gives you options. It gives you choices. How much cash you have on hand is your cash position. How much cash you can generate over time is your cash flow. When you have cash on hand because of good cash flow, it gives you the freedom to make decisions from a position of strength. Getting to a position of excess cash flow (more coming in than is going out) allows you to operate strategically and proactively rather than defensively and reactively.
•Cash flow fuels growth. Your business’ ability to generate cash is a major factor in determining whether you qualify for a loan. Essentially, when you borrow money, you are agreeing to pay it back using future cash flow. So not only do you need to generate cash to fund ongoing operations, but you need to demonstrate your ability to keep on generating cash (at the same or higher levels) to make payments on loans you may want to secure to invest in future growth.
•Cash flow determines access to capital. Being able to reliably generate cash flow over time improves your chances of securing the capital you may need for a new warehouse, new equipment, upgraded technology or other investments you want to make in the long-term success of your business. Most businesses, large and small, fund growth through capital loans because even the most successful businesses simply don’t have the cash on hand to pay for large capital improvements. So to fuel growth, you need access to capital. And getting access to capital is predicated on reliable cash flow.
•Cash flow gives you flexibility. Need to cover an unexpected expense? Want to bring on an additional employee? Looking at beef up your marketing and advertising? All of these decisions are easier to deal with if you have the peace of mind that comes with cash.
So having good cash flow is a critical advantage to your business. But managing that cash and cash flow is just as critical. It does you no good to generate thousands of dollars (or millions of dollars) in monthly revenue if you can’t expertly manage how that money is utilized. This where having a good financial partner comes into play.
Good financial partners typically have these traits
•Strong personal relationships. When considering which bank you’re going to choose as your financial partner, you want one you can trust. And the best way to build trust is through a good, old fashioned personal relationship with an actual human. Someone who gets to know your business, your needs, your markets, your competition, your plans and dreams. Someone who is truly a partner you can turn to for expert advice. Building that kind of relationship takes time but it’s an investment that pays high dividends when you need to make a big decision, in both successful times and more challenging ones.
•The ability to scale as you grow. If you’re a small business, maybe shortening the time between sending an invoice and getting it paid is your biggest concern. If you’re a medium sized business, maybe building and turning over inventory is more important. If you’re a large business, perhaps you want to invest in a new location so you can add new production lines. You want a partner who offers multiple options that work not only for how your business is today but how your business will be tomorrow.
•Shared commitment to success. The best partnerships are those that are mutually beneficial. You want a partner who understands and shares your commitment to not only your business but how your business enriches your employees and your hometown. As your business prospers, those ripples make their way through your community and have a positive impact. Working with a bank that shares this commitment to community amplifies those ripples so they have the greatest effect.
Cash is truly king when it comes to the success of your business. Staying focused on cash, cash flow and cash management – including access to capital – will help to ensure your business’ long-term success. Having the right financial partner to help you keep an eye on cash is crucial to that success.
Because, even though cash is king, your business is still your kingdom. And it’s far better for you to rule your kingdom with cash than have your kingdom be ruled by cash.
Written by Peter Maher
Executive Vice President, Chief Lending Officer, Union Savings Bank