For generations, business operators have learned that Cash is King. And there is never a moment in the life of any business, large or small, when this generally accepted truth does not apply. But in 2009, small businesses must elevate cash to an even more supreme level. Consequently, these days, and for the foreseeable future, Cash is not King, it's the Emperor.
My 3rd 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 is always a growth or operational element hungry for cash from any source.
- Small businesses typically have only three sources of capital: a) Reinvested profits; b) Bank loans; c) Investment equity, usually from the owner.
So what's the difference between cash and capital? Operating cash flow is like breathing – in and out, consistently. Growth capital is like muscle-building protein – it must be committed long-term. Alas, too often small businesses fund growth with operating cash flow. The reason is because it's easier: it's there, it's their and they can. But this is a dangerous practice because it deprives the business of operating breath in order to build growth muscle often resulting in asphyxiation.
All cash in a small business is precious, so availability and proper application must be maximized. Here are a few fundamental best practices to accomplish this.
- Sell products and services at a gross profit margin that will more than fund operating expenses. Manage expenses like a she-bear guards her cubs.
- Manage accounts receivable like your life depends upon it – it might.
- Re-invest profits back into the company.
- Do not use operating cash flow to fund growth.
Someone once said of small business, "You're either green and growing, or ripe and rotten."
Literally by definition, small business survival depends on some level of growth, which takes capital. Sales growth begets increased 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 are exciting, but all take fresh, properly acquainted and applied capital, and that's why the performance degree of difficulty for a small business to grow – and sometimes, survive – is greater than for a big business.
Write this on a rock … "The King is dead. Long live The Emperor."