This article was first published on 2 January 2020 and we have updated it.
Many business owners naturally spend a lot of time focusing on generating profits for their business. Profits play a critical role in the sustainability of any business, for without it, the company would eventually fold. No company, large or small, can survive long-term without being able to make profits.
Profitability tends to be the end game for many commercial businesses. However, this doesn’t mean it’s the most crucial factor for business success. Instead, what is equally, if not more important, is for entrepreneurs to ensure that they maintain a steady cash flow to keep the business running.
Cash Is King
As the saying goes, cash flow is the lifeblood of any business. To survive, a company needs to have enough cash to cover its short-term business expenses.
Having cash in the business account is akin to a man in a desert who is well equipped with food, water and equipment. While the food, water and equipment will not help him find his way out of the hot desert, it is essential in keeping the man alive, giving him the crucial time he needs to figure his way out eventually.
Positive cash flow not only buys us time, but it opens up business opportunities for us. Often, entrepreneurs are not limited by their ideas, but rather, the resources they have to carry out their plans.
Ultimately, any plans that we want to implement for our business will cost us money, be it to hire new people, spend on marketing initiatives to increase customer base, or invest in research and development to improve existing products and services.
Don’t get us wrong. Profits ARE important.
Without profits, your business will not survive. No amount of cash in the bank is going to be enough if you have a business model that isn’t even viable in the first place. And would continue leaking money indefinitely. It’s like a man in the desert equipped with lots of food, water and equipment, but has no idea how he will get out.
But, without having cash, you won’t be able to survive, let alone execute your plans, regardless of how profitable your business model may (potentially) be.
Even Big Companies Are Not Always Profitable
It’s worth noting that some of the biggest companies in the world today are yet to be profitable. Publicly-listed companies such as Tesla and Uber are valued by investors to be worth billions of dollars. However, these tech companies are not generating profits for their investors (yet). Closer to home, companies such as Carousell are faring well, with a valuation of close to a billion dollars, but are still making losses each year.
However, the reason why these companies are still able to grow rapidly despite not being profitable is because they have cash. Having cash allows them to capitalise on growth opportunities. It gives these businesses a choice to be aggressive in their expansion and provides leeway to take calculated risks.
Of course, just because you have enough cash doesn’t mean it’s okay to have a lousy business model. You can’t. As an entrepreneur, it’s your job to ensure that your business model makes financial sense. For the business to survive, there has to be the right balance between having a viable business model and steady cash flow.
Due to the business challenges brought upon us by COVID-19, 2020 has been a year that has seen many start-ups shifting away from growth, and prioritising sustainability.
The likes of Grab, Airbnb, Zilingo and others have retrenched workers as they move towards conserving cash during this uncertain period. This shows that even big companies need to practice good business financial management. At the same time, we can see the Hertz on the brink of failing, not because their business model was poor, but because of cash flow problems which have been exacerbated by COVID-19.
How To Get Cash For Your Business
Having a business that generates positive cash flow each month is great. But it isn’t the only way to ensure that your business has enough cash.
Retained Earnings: Retained earnings are the cumulative net profits of the business. A profitable business can strengthen its cash flow position its earning instead of paying it out to its shareholders.
For example, if DollarsAndSense makes $100,000 for 2018, we may choose to pay out a part of our profits (e.g. $50,000) as dividends to our shareholders. However, to strengthen our cash position, we can choose to retain the earnings in the company instead.
External Investors: If the company needs cash, it can raise from investors via a fundraising exercise. But for many small businesses, fundraising exercise may be difficult to pull off. Entrepreneurs will need to answer difficult questions, such as, why do you need more money? What are the chances that the investor will get back their money? What are the returns that the investor will get?
Also, raising funds externally from investors means giving up a part of share ownership.
Bank Loan: Another way to get more cash for your business is to take a bank loan. For Singapore businesses, local banks such as OCBC offer business owners working capital to help them manage their cash flow. This allows business owners to focus on running a profitable company (which is important) while still having the flexibility to tap on business loans to manage cash flow challenges.
To help Singapore companies survive through COVID-19, the Singapore government has also introduced schemes such as the Temporary Bridging Loan Programme. This scheme allows eligible businesses to borrow up to S$5 million, with a repayment period of up to 5 years. Interest rates for the schemes charged are capped at 5% per annum, with the government taking on 90% of the risk-share for new loans being applied from 8 April 2020 to 31 March 2021.
To help business owners in Singapore better manage their cash flow, OCBC has recently added business financial management capabilities for their business banking account users. These features will be free for OCBC business banking account users.
With these new features, business owners can now get a complete, real-time view of their business finance, providing them with better insights into their cash flow management and to forecast any potential near-term challenges.
Every entrepreneur needs to have a viable business model that can be profitable in the long-term. However, during this challenging COVID-19 business period, perhaps it makes sense to be placing the emphasis on surviving rather than growth. This means ensuring that we have sufficient cash (and positive cash flow) to keep the company going so that we can execute the business plans that we have.
Need Financing Support During This Period?
From now till 31 March 2021, SMEs can enjoy extra financing support of up to $5 million through the Temporary Bridging Loan Programme.
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