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Focusing on Cash Flow

Mark H. Brennan, President and Chief Operating Officer, Las Vegas Coffee Investors, LLC

Undoubtedly, you’ve heard the phrase “cash is king” many times. And when you hear it directed at you in your role as an entrepreneur, you probably smile, nod politely, and then go right back to your thoughts on how to better prove your seed company’s strategy; how to market your product to the right demographic; how to manufacture your product at a lower cost; and how to best implement the work environment protocols to create the perfect corporate culture.

Well, as a long-time entrepreneur myself, I can tell you unequivocally that cash is not only “king” in a seed and early stage company, but it is queen, bishop, knight, and rook too. It is virtually the entire chess game. Without appropriate initial capitalization and effective cash management thereafter, you will fail – period. So please heed my words as I encourage you to actively manage your cash – it will pay dividends, both literally and figuratively.

Over the years I’ve developed a simple spreadsheet that I use daily to monitor my company’s cash flow. I also use it to look forward thirty, sixty, and ninety days just to prevent negative surprises. This spreadsheet takes about fifteen minutes to produce and it is one of the most important reports I receive and review. It allows me to see the real dynamics of my business on a single sheet of paper.

No doubt, cash management is critical for many reasons, a few of which follow:

  • Capitalizing your business is difficult and time-consuming – and oftentimes downright painful. Whether you are raising money with the help of friends and family, angel investors, or venture capitalists, you will spend a great deal of time cobbling together the appropriate funds to initially capitalize and then sustain your business until it breaks even and ultimately produces a positive cash flow. By effectively managing both the cash that you raise as well as the cash that your company subsequently produces, you may save yourself and your senior leadership team the considerable time required to raise additional funds later.
  • Good cash management may reduce the percentage of the company you need to sell to investor groups. If you manage the cash raised in the early rounds of financing well and achieve many of your company’s short- and intermediate-term goals, you can increase the value of your company’s stock. Then when you do need to go back to the capital markets for funding, you can do so at an increased valuation. This enables you to sell less of your company’s stock and, as a result, retain greater ownership interest and control of your venture.
  • Managing your cash well can help you take advantage of “less expensive” funds through access to debt financing. You may need to borrow lesser amounts, and probably borrow less often, thereby saving your company interest payments over time. Additionally, by showing your lenders that you are a good credit risk, you will be able to negotiate better terms on your debt financing, further lowering your overall payment stream and enhancing your overall cash flow.
  • Projecting your company’s cash needs will enable you to anticipate when your cash outflows will exceed cash inflows. Then, you can determine how temporary gaps can be weathered by short-term cash cycle manipulations, such as stretching your accounts payable for a few weeks and increasing your company’s focus on collections from clients. You will find David Chavez’s article on A/P or Barry Moltz’s piece on A/R part of this Collection. When cash flow gaps are more pronounced, by actively forecasting your needs into the future, you will see more quickly when you need to tap the company’s bank line of credit or, even more important, when it is imperative that your company establish a bank line of credit so that you have something to tap before the situation becomes urgent. Additionally, you may be able to negotiate more favorable terms with your creditor when you’re not in a panic situation.
  • Actively managing your cash will cause you to more actively manage your vendor relationships. Of course, vendor relationships can become strained if you are constantly late in paying your bills. When cash is well managed, relationships strengthen and vendors can become “partners.” Then when you must miss a scheduled payment or stretch payment to a vendor a bit, your vendor will be more likely to work with you than to put your account on COD, or cut you off entirely. And in the long-term, solid relationships with your vendors may allow to you to negotiate more favorable terms, which will again save you money.
  • Managing your inventory effectively is much akin to managing your cash directly. In fact, when I look at inventory on a shelf, I visualize stacks of cash. After all, inventory is “cash.” And, frankly, I’d rather have that cash in the bank working for my company than idle on my warehouse shelves. Just-in-time methods are the most common and well known for maximizing the utilization of your inventory assets. Good inventory management can also reduce the size of your storage facility, allowing you to reduce the size of your real estate costs. Less space also probably means fewer resources to manage that inventory – fewer people, fewer stocking racks, fewer loaders/forklifts, etc. The cash you would have otherwise spent on these items and the inventory itself can then be used for other more productive purposes.
  • Actively managing cash may allow you to take advantage of opportunities for growth. Sometimes it is more expedient to grow by acquisition than organically. Recently, I had the opportunity to buy-out a competitor’s operation at a deeply discounted price because I was able to quickly (within forty-eight hours) come to the negotiation with an all-cash settlement offer before other would-be buyers even knew this particular operator was in trouble. Good cash management may also lead you to opportunities to purchase distressed inventories, equipment, or real estate at discount pricing.

There are a whole host of good reasons to take an active role in managing the cash flows that sustain your business. Managing your company’s cash gives you keen operational awareness of your company’s finances and its capabilities. This awareness will permeate all that you do as you switch hats daily and even hourly to create, grow, and run your business. You will also be a better, more informed leader because of your active involvement in your company’s cash flow.

In conclusion, regardless of the size of your venture, never forget that “cash is king,” for if you do, it will be to your company’s great peril.

© 2006 Mark H. Brennan. All rights reserved.

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