Too little capital is often an issue in a start-up venture, but management of cash position is important at any life stage in any business. Rapidly growing companies have very specific cash decisions to make, but let’s look at it today in terms of business life stage.  

Start-up- The wide-eyed owner
Nobody would start a business if they didn’t expect that it would result in financial rewards, right?  So the would-be owner goes into the venture operating under the assumption that he or she is going to make money, maybe even BIG money.

The reason why we’re calling this the wide-eyed stage regarding capital is that often the prospective business owner assumes that as soon as the proverbial shingle is out, customers will file in and the phone will be ringing off the hook.  This assumption leads to a new business owner using a lot of capital to get started, wanting the nicest location, the best tools, and the most expensive business cards.  It’s all about the image, right?  The big company look?

The new business does create a first impression that has to be managed.  But ultimately all of the start-up has to be funded by something.  If the owner is using personal assets to finance the venture, the new operation can become a money pit that consumes unanticipated quantities of cash.  And if the owner is borrowing to fund start-up he or she builds in a must-perform situation so that the loan can be repaid without surrendering assets to do so.  

It can be a better choice to conserve cash (operating under a worst case scenario of slow cycle time) and bootstrap investments like marketing, etc.  Use profits to fund these things, rather than expend the money on them up front, or find low- or no-cost ways to implement them.  This is one of the reasons why social media has been so popular for marketing new small businesses – unless you go for Pro upgrades or sponsored links, social media is free if you invest a bit of time and sweat.  No cash involved.

Mid-stage – Profits don’t equal cash
There are two issues that crop up when the company has already acquired customers and achieved some success:

  • Over-expansion
  • Cash flow/collection issues

Over-expansion is a similar problem to the one of the start-up that goes gonzo setting up.  It might result in a business opening one or more additional locations too soon (often financed by debt and resulting in debt service), purchasing a large piece of equipment, overstocking inventory, or trying to franchise their concept.  All of these actions consume cash, and until (and unless) they start producing revenue they are a drain on the company’s available cash for operations.

As for cash flow and collections, selling is one thing – getting paid is another.  Customers have their own cash flow issues to manage, so their goal is to pay slowly while the seller’s goal is to obtain cash as soon as possible.  If the business’s bookkeeping accounts for sales when they are made (not collected) the financial statements could show a healthy profit while the cash coffers are nigh on empty.  So the business has to be aware of its cash position at all times, and manage its billing and collection processes effectively.

Later stage – Reaping the rewards
When an owner starts a business, one of the goals is often to build an asset that will support him or her in retirement.  And in a family business, that starts to look like son or daughter taking over the business while continuing to pay mom or dad regular money.  The cash problem with that scenario is that while the business sustained the owner’s comfortable lifestyle, it might not be producing enough cash to sustain the next generation AND the prior one in the style to which it has become accustomed.  Capital that could be reinvested in the business to maintain or replace cash-producing assets is instead diverted to Dad or Mom’s bank account.  And the next generation can wind up being burdened by debt service instead of floating on a cushion of retained earnings.

In some instances it can be a better choice for the owner to cash out of the business – to sell it and take his or her lump of cash proceeds to the bank.  This assumes that the business has adequate assets and proven cash flow to make it a salable entity.  With a third-party purchaser flush with cash or financing this can be a good choice for the owner.  But when a family member is taking over the business a decision to cash out (and force the kids to borrow ) rather than keep money in the business can place the next generation (and familial relationships) at risk.  Cash concerns aside, Sonny Boy or Dear Daughter might be quite ready and willing to take the financial risk of borrowing for a buy-out so Dad’s or Mom’s nose is out of the business, giving the new owners more autonomy.