Is Being Cash Rich Always Good News?

 Many times, heads of small companies are boasting about being cash rich, having zero debt, and enough money to take care of the working capital requirements and more. But is it always a happy news being cash rich? Though big companies like Google and Apple are also cash rich, but they use a lot of their cash for research and reinvestment in business expansion. When it comes to small and medium scale companies, I have seen a lot of these especially after the pandemic, having a lot of cash in accounts and still running the business and paying for their operating expenses. In my opinion, the reasons could be much more concerning than otherwise visible. Let me make some points for several companies that had maybe 5% of their revenue as cash reserve to them having a lot more cash reserve now:

1. The business is not growing due to existing external conditions leading to low payables and better cash building up.
2. The raw material purchased by the companies during pandemic is not fully utilised because there are low sales, leading to less purchases. 
3. Few companies that did massive layoffs during pandemic have not fully rehired keeping their employee expenses low. 
4. Finally, the company has no growth strategy and is not reinvesting enough.

The first three reasons could be temporary and might fade once the market conditions change, but the fourth reason is a serious concern. Why I want to concentrate on this reason is because it leads to stagnation of business and eventually the company lies just like a wounded lion waiting for the hyenas to come and do the deed.

Such businesses might give an all-goody picture to the world mentioning the steady sales, controlled operating expenses and no need to raise debt, but reality is far from what is depicted. Few ways of realising the problem with such companies is to observe the following: 

1. The amount and nature of capital expenses. 
2. Whether the revenue is stagnant or shrinking. 
3. The nature of expenses. 
4. The growth in the volume of goods sold along with the growth in revenue. 

The fourth point is mentioned because a lot of businesses raised the prices of their goods in lieu of everyone doing the same once the markets opened post pandemic. A few companies might show a marginal growth in revenue, but their volumes of goods sold might have actually decreased.

If a business does not have a growth strategy and is not reinvesting enough to fulfil its goals, then eventually such businesses will either have a stagnated trajectory or wrap up once a competitor makes a move against them. The point to remember is that businesses without a vision and a strategy especially in such volatile market conditions eventually move towards their slow demise.

 

Not all grass is green 

Manan

Is the loan for business expansion becoming your working capital?

 Yes, I know this can sound a bit confusing to some, but sorry I cannot help it, this is too important of a strategic slip that small businesses make. I guess this all starts from not having something very basic that even a home-run business should have, and that is a Vision and Mission. So just to provide you a gist of this, Mission is answering “Why are we running this business”, and Vision is finding an answer to “Where do we see ourselves in maybe 10 years”.

Often, I have seen businesses starting their operations and then taking loans for business expansion, but eventually using them to fulfil their short-term working capital requirements like maybe paying vendors to keep getting supplies, paying salaries, and taking care of other operational expenses with the same money. Few months down the line, these companies realise that the debt fund raised to expand business has neither created any new asset, nor developed any new business opportunity. In a sense this money has not been able to increase or generate new cash inflow and the business is left with a loan (short-term or long-term) to be repaid along with a hefty interest.

Such mistakes should particularly be avoided during the initial stages of business since they have a potential to put it in a never-ending debt spiral. In this the business is continuously borrowing money to pay off previous debt and is not left with any money for taking care of its working capital needs, or to further invest in expanding operations. One way of beating this is maintaining a healthy debt-to-equity ratio which is the key to controlling dependency on debt especially in the early stages of business where cash inflow can be limited, and operational expenses are on a higher side.

Below are a few key things I did, or rather disciplines I suggest one follows to avoid such mess in the early stages of business:

• Always be strict with the credit period given to the clients for payments. Remember the more days they take in making the payments, you lose on cash needed to drive your operations. 

• Try and ask for advance payments even if it means giving some affordable discounts to the client.

• Maintain a touch base with clients so that they remember you for their requirements, and also so that they don’t forget to pay their dues. 

• Keep your suppliers happy by paying on time. This is especially important in the early years since the suppliers are reluctant to open credit line to new and small businesses. Remember, in business – trust is everything.

• Save money and then strategically invest in expanding business. Even if the expansion is being financed by debt, be sure that your working capital needs are taken care of. Always raise the amount of debt that you are confident the business will be able to pay off.

• Finally, having a strategy for your business goes a long way in ensuring financial discipline. Keep your business strategy aligned with your financial requirements so that there is no overindulgence with debt and a monetary discipline is followed.

I guess this sums up my key concern with most of the small and young businesses, and I hope this helps in forming a good strategy for operating in markets and expanding your business operations. Always remember,

 

Discipline is everything!

 Manan