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Hi everyone, and welcome to another awe-inspiring episode of ThoughtLeadership.biz.
I’m Chris Machut and today we’re talking about a common misconception, one that has the potential to bury business and end entrepreneurial adventures before they’ve even begun. . .
We’ve all heard the saying: ‘Cash is king’, and it makes sense when we’re talking about business, right? After all, trying to run a successful business without having the capital to support it means we’re acting like the little piggy who tried to build his house on sand: Sooner or later it’ll get washed away and you’ll be left with nothing apart from huge debts, potential lawsuits and possible bankruptcy.
Anyone who’s seriously considering starting their own company knows that, right?
But the truth is, the entrepreneurial coin is two-sided, and truly successful business leaders – guys who have built their businesses from the ground up and kept them growing long-term – can see both sides.
Whether you’re just starting out or are a seasoned entrepreneur with more fingers in professional pies than a platoon of pastry loving little piggies, the same golden rule applies:
Cash ain’t always king.
And there’s a good reason why.
But before we get into it, let me remind you to check out all my newest articles, podcasts and more at ThoughtLeadership.biz, catch me in person on YouTube or listen via Spotify and Anchor.fm. You can also enjoy my dulcet tones on Apple and Google Podcasts, subscribe to my rants via Twitter or connect on LinkedIn.
Right then, so what’s the deal?
Well, it’s pretty simple really.
The fact of the matter is that cash is crucial for obvious reasons – but cashFLOW is king. Because if the cash ain’t flowing, there’s only one direction your business is going – and it’s downhill.
It’s a lesson that many business owners learn the hard way. So, my advice is don’t be one of them.
In the simplest terms, it doesn’t matter how much cash is teed-up and ready to roll in the future because if you don’t have access to the funds you need today, tomorrow won’t happen – at least not in the way you want it to.
Instead of champagne lunches, magazine interviews and a jet-set lifestyle, it’ll be cold pasta, online job searches and car-pooling with more fortunate friends.
Because the world won’t wait for you to catch up.
Slowly but surely, the nice little life you’ve built for yourself will unravel, the security you thought you had will slip away, the walls will start closing in and the sharks will start swimming.
Your landlord won’t wait for your rent again, despite your assurances that you’re about to land one of the biggest fishes in financial history. Your suppliers won’t extend you any more credit as a favour or a gesture of goodwill to be paid back in future. And your employees won’t wait to be paid. Period.
So, the bottom line is: cashFLOW, not cash, is really king.
Now you might be wondering why the idea that ‘cash is king’ is such a popular one – one that mesmerizes so many budding business leaders before burying them in stress and debt.
Well, it’s plain and simple really.
Cash is powerful. It makes you feel rich. It makes you feel that anything is possible. It makes you feel secure. And that’s the problem.
The reality is that regardless of the quantity, cash, or capital, is a finite commodity and if you keep spending, it keeps shrinking until there’s nothing left.
Now, you could say, ‘Well, yeah, but I need to spend the cash to make more cash in future.’ And that’s true. But unless you spend that money properly, sooner or later you’ll be swimming with the sharks because the money that’s coming down the pipeline in future is only theoretical: It’s a potential, a possibility, an opportunity.
But no matter how ‘certain’ they are, cash-making potentials, possibilities or opportunities in future are simply not the same as cold, hard cash-in-hand. There are simply no guarantees that what’s possible or even highly probably in future will actually materialize.
That means that unless you’ve got the required amount of cash coming in on a regular basis, you haven’t really got anything at all.
Let’s take the example of a new start-up that on the surface looks successful but is, in fact, worthless.
Let’s say Company ABC raises millions of dollars through its investors but doesn’t actually have any cashflow. Sure, they’ve got cartel-sized containers of cash in the company cupboard and their bank balance looks very healthy indeed, but until they aren’t start making something they’re essentially worthless, right?
They might be snapped up and acquired for billions of dollars without ever actually being ‘cashflow positive’ – it does happen – but unless they begin to generate enough income, sooner rather than later they’ll go bust and add their names to an ever-growing list of pseudo business leaders who mistakenly equated huge capital with huge success.
So, why do so many business owners fall into the same trap and only look at one side of the coin? Why do they focus on creating a profit rather than cultivating the conditions needed to ensure long-term cashflow?
Well, there are three main reasons:
First, they’re too positive and have unrealistic expectations about income versus expenses. Whether this mindset is born out of arrogance, ignorance or an unconsciously blended cocktail of both, the fact remains that if you don’t balance this equation properly, you soon find yourself in mounting debt.
Which leads us on to the second reason:
Business leaders often assume that loads of cash means long-term security, only to find out the hard way that it’s an illusion. By overestimating how far their current funds will stretch, they quickly run out of cash and then start panicking.
Before they know it, they’re on the phone to friends and lenders, some of whom might help to bail out some of the water in their sinking ship or help to keep it afloat a little longer by driving them into insurmountable debt. But that can’t go on forever. Sooner or later, the ship sinks. And you go down with it.
The final reason is that rookie business leaders often don’t budget well enough for nasty surprises – and they will happen. Contingency planning can be the last thing on your mind when you’re busy scraping together all the funds you can just to keep the wheels from falling off during the early stages of your enterprise. But that’s a BIG mistake.
All is takes is one nasty little surprise to wreck your business plan and demolish your entrepreneurial dreams.
So, be prepared.
There’s a very good reason why the ‘S**t Happens’ bumper sticker sold so well. . .
Right then, there we have it. Three ways to avoid a cashflow crisis and make sure you ain’t swimming with the sharks this time next year.
The main takeaway?
Cash is crucial, but cashFLOW is king.
Probably a bit long for a bumper-sticker, I know – but certainly worth remembering.
This is Chris Machut.
See you next time – and stay safe out there!