I work with entrepreneurs to help them grow their ideas. This usually means we help them with planning, structures, implementation of processes, and financing. The first stop for most of our clients is grants. While we are working to improve the take up of loans, it’s not the loan versus grant scenario that I think most businesses need to reconcile….it’s the use of cash. A finance professor of mine, who could easily construct complicated financial tools to assist businesses and was always pounding us about the importance of leverage and value, left me with one memorable phrase: Cash is King. On the face of it, this comment seems completely obvious, but to most entrepreneurs I run into in the third sector-its not.
Why not? Well, let me explain what I mean when I say cash is king. In simple terms, this means that if you believe your activity is creating value, adding to growth, or is simply a temporary expenditure between income streams you should borrow or delay the use of cash in these situations. Why? Because when the cash runs out, it’s over. And when the cash runs out, it will only be the really spectacular business models that can summon the cash from an emergency source. Lots of good businesses fail because they do not follow this practice of treating cash as king.
Back to the why not? Most social entrepreneurs see borrowing (the easier route) as something completely foriegn and in fact view it as the first step to disaster. I get a sense that the fear of borrowing is hugely a cultural issue for my clients (although the UK is catching up fast in the unsecured debt arena), but I think it is more likely the simple affect of FUD. (Fear uncertainty and doubt). Because they do not realize the potential for leverage and how it works to add value to your operations or they lack the financial savvy to understand the various financial tools available they simply avoid them altogether.
I am not suggesting borrow without care. What I am suggesting is that borrowing can be an effective tool in the right situation to add tremendous value to your enterprise while helping you conserve cash for the rainy days. Remember, cash is king.
Don’t believe me? Then read what others have to say:
BBC – The Biz
Venture Blog
Or simply Google “Cash is King”
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