Here is a current article by Jim Blasingame, Contributing Writer, at the Atlanta Business Chronicle. We discuss this in great detail in class and Jim makes some great points. Veterans must learn early-on in their business career that guarding cash is a critical task for success.
Blasingame writes---For generations, business operators quickly become well acquainted with that rudest of all marketplace maxims: "Cash is King."
Indeed, there is never a moment in the life of any business, large or small, when this generally accepted truth doesn't apply. But since 2008, lackluster economic conditions have caused small businesses to redefine the sovereignty of cash and elevate it to an even higher level of royalty than before. No longer is Cash merely King; it is now, in fact, Emperor.
Blasingame's 2nd Law of Small Business states: It's redundant to say, "undercapitalized small business." There are at least two reasons this is a law and not a maxim:
There are always growth and for operational elements demanding cash, and they don't care where it comes from. Unlike big business, small companies have limited capital sources - and typically they have only three: Reinvested profits, bank loans, and investment equity, usually from the owner.
What's the difference between cash and capital? Operating cash is a business's breath - constantly moving in and out.
When applied to growth, capital is like muscle - building protein, strengthening the organism long-term.
Too often small businesses fund growth with operating cash flow. But this dangerous practice misapplies and reduces the business's operating oxygen.
All cash in a small business is precious, so availability and proper application must be maximized. Here are a few cash management best practices:
- Don't delegate cash management.
- Manage expenses like a she-bear guards her cubs.
- Manage accounts receivables like your business's life depends on it – because it does.
These capital management guidelines will actually improve your cash picture:
- Make sure pricing produces enough gross profit to more than funds operating expenses.
- Convert profits to retained earnings.
- Use retained earnings, not operating cash flow, to fund growth.
Someone once said of small business, "You're either green and growing, or ripe and rotten." By definition, small business survival depends on some level of growth, which takes capital. For example:
- Sales growth begets increased inventory and accounts receivable.
- Personnel growth begets more infrastructure, like offices, equipment and, of course, payroll.
- Product expansion begets increased marketing, training and retooling.
These "green-and-growing" elements can be exciting, but all take properly acquired and applied capital. Last maxim: The degree of difficulty for managing cash and acquiring capital is much greater for a small business than a big business.