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.
Read Also: 4 Financial Ratios That Startup Owners In Singapore Need To Know
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 having a lousy business model is okay. 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.
Amazon, Google, Lazada, and others have retrenched workers as they move towards conserving cash when interest rates are high and the business environment is slowing. This shows that even big companies need to practice good business financial management. Those who don’t will eventually fail. In 2023, WeWork filed for bankruptcy to protect itself from creditors, as it could no longer make its financial obligations.
How To Get Cash For Your Business
Having a business that generates positive cash flow each month is excellent. But it isn’t the only way to ensure 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 and position its earnings instead of paying them out to its shareholders.
For example, if DollarsAndSense makes $100,000 in 2020, we may pay our shareholders some of our profits (e.g. $50,000) as dividends. However, to strengthen our cash position, we can retain the company’s earnings instead.
External Investors: If the company needs cash, it can raise from investors via a fundraising exercise. However, for many small businesses, fundraising exercises may be challenging to pull off. Entrepreneurs must answer difficult questions, such as why 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 some 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 into business loans to manage cash flow challenges.
Read Also: Entrepreneurs Share How Taking Business Loans Have Helped Them Grow
This article was first published on 2 January 2020 and we have updated it.
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