Many business owners focus on generating profits for their business. Profits play a critical role in the sustainability of any business, without it, the business eventually folds. No business, large or small, is able to survive long-term without making profits.
Profitability tends to be the end game for any for-profit company, but it should not be used as the most important indicator of success. Instead, entrepreneurs should also focus on maintaining a steady cash flow to keep the business running.
Cash Is King
In order to survive, a business needs to have enough cash.
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 while he figures his way out.
A positive cash flow not only buys us time, but it opens up business opportunities for us. 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 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 your business model isn’t viable. It’s like a man in the desert equipped with lots of food, water and equipment but has no idea on how he is going to 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
Some of the biggest names in business today are yet to be profitable. Publicly-list companies like Tesla and Uber are valued in billions, but these tech companies remain short of generating profits. Closer to home, companies such as Carousell are faring well, with a valuation of close to a billion dollars, but are not profitable either.
The reasons why these companies are able to grow rapidly in spite of not being profitable is because they have cash. Having cash allows it to capitalise on growth opportunities. It gives these businesses the choice to be aggressive in their expansion, and provides leeway to take calculated risk.
Of course, just because you have enough cash doesn’t mean it’s okay to have a lousy business model. You can’t. As the business owner, 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 a steady cash flow.
Ways To Get Cash For Your Business
Having a business that generates positive cashflow each month is great. But it isn’t the only way to ensure that your business have enough cash.
Retained Earnings: Retained earnings are the cumulative net profits of the business. A profitable business can strengthen its cashflow position by retaining a portion of 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. Investors will need answers to 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 also 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 Singaporean businesses, local banks such as OCBC offer business owners working capital to help them manage their cashflow. 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 cashflow challenges.
At the end of the day, every business owner needs to have a viable business model. Most would place the emphasis on profitability. However, beyond that, we have to ensure that we have sufficient cash (and positive cashflow) in order to 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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