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A business starts to die if cash in the bank moves toward zero or stays still (idle cash = death by inflation).  A business is growing and alive if average cash in the bank moves toward (theoretical) infinity.  Cash in the bank must be growing over time in order for a business to be alive.

Dying business: dy/dx ( cash in  bank ) <= 0
Growing business: dy/dx ( cash in  bank ) > 0

What does it mean for a business to be alive?

A live business does two things:

1. Has a functioning operational process.

The purpose of operations in a business is to:

Run a customer’s money through a process which:

a) returns something of value to the customer and
b) puts as much of the customer’s money as possible into the bank (the greater the operational efficiency, the greater the % of the customer’s money will end up in the bank).

If operations is not functioning, then the end results a) and b) are not achieved.  If a) is not received, the customer will demand their money bank, leading to no cash being put in the bank.  If b) is not achieved, this will also lead to no cash being put in the bank.

 2. Continually feed operations.

If sales and marketing do not provide operations with the customer’s money to turn into value and banked cash, operations will have nothing to process, and so the aforementioned a) and b) will not occur, and consequently, no cash will be placed in the bank.

What happens when there is no cash in the bank?
When there is no cash in the bank, a business will begin dying.  Death is typically not instantaneous, but a gradual process.  It may be so gradual, it can be like cancer and unbeknown to the business owner until too late.  The following steps will occur:

1.  If no cash is in the bank, then expenses (salaries, rent, etc) must be paid for on credit.

2. However, if no cash is in the bank, the creditors will not be paid back, resulting to a freeze on the credit.  A freeze in credit leads to expenses not being paid = employees not being paid (and quitting), utilities not being paid (and shutting down), and landlord not being paid (and being evicted).

A business with no employees, utilities, or place to do business has no functioning operational process, and by definition of a “live business”, is not alive.

How do I put cash in the bank?

The question may seem simple and the answer may seem obvious, but it is worthwhile to outline.  Cash enters the bank by one of three methods:

1. The Operational Process
The operational process takes the customer’s money, and puts a portion of it in the bank after returning the customer something of value (which requires a portion of the customer’s money).

Customer’s Cash => Business => Value to Customer + $x profit

2. The Investment Process
Investor’s cash is placed in the bank in exchange for a portion of the company’s equity. Eg seed capital, venture capital, acquisition capital.  This can take a considerable period of time as courting, due diligence, and legal paperwork is involed but allows room for a longer repayment-period, and no guarantee of repayment.

3. The Credit Process
Creditor’s cash is placed in the bank in exchange for an agreement to pay back the loan.  Eg bank loan, credit card loan, credit lines.  This will take far less time than the investment process and is typically easier to obtain, but the repayment timespan is much shorter, and requires a guarantee of repayment.

The purpose of #2 and #3 is to drive #1. Without #1, the business has no long-term method of putting cash in the bank.  #2 and #3 is typically used to build #1 to the point that it can provide a positive return on the initial cash input of #2 and #3.

Investment Cash + Credit Cash => Business => Investment Cash + Credit Cash + $x profit from Operational Process

If cash is not being put into the bank by one of the three methods, then the business will begin dying. The rate of death is a factor of cash in the bank and expenses per month.

cash in bank + credit limit___  =  months business life
expenses per month

As such, one of the most common dangers a small business will face is due to lack of sufficient funds in the bank when:

a) an internal business error is made, or

b) external circumstances impact the business.

All internal business gambles should therefore take into account maximum loss potential, and this maximum loss potential should not exceed cash in bank, taking into account current cash flow.

If however, an unforeseen circumstance occurs resulting in some operational or marketing decline, then one should plan ahead to have sufficient cash in the bank to weather the storm.  In the case of a downturn in the economy or recession, credit lines will tighten up and revenues may suffer.  If revenues suffer and cash in the bank is not growing, then the business will start to die.  As such, the businesses with enough cash in the bank to survive until eceonomy picks back up, will survive.  The businesses that lack sufficient cash in the bank to keep the business alive until things turnaround will die.

How much cash should I have in the bank?

This will depend on how severe the operational/marketing decline or external circumstance is.   This may be like forecasting how long a downturn in the economy will last.  There is also the challenge of keeping funds in the bank unused, when they could be utilized to further grow the company and put more cash in the bank.

A good starting point may be to hold at least one business cycle/season’s expenses in the bank.  This way, the business owner should be able to identify and remedy problematic trends before it is too late.

Fortunes are spent each lifetime on things that sustain us, and things that drain us.  But what is the ultimate sustanance of life?  If we consider ‘life’ to be the period of time that we are conscious and alive (as opposed to unconscious and/or dead), then time would be a universal currency of ‘life’.  The more time you have, the more life you have.  For example, a person that has 70 years of life would be considered to have more time than somebody who has 30 years of life.  As such, the person who has more could be considered more ‘wealthy’, if we attributed time as a currency.

Now if time is a currency, it must be able to be traded, bought, and sold.  The question is, how does one buy time?  If Walmart, Ebay, or Amazon don’t sell it .. how does one acquire more time?

For a business, a first stage of financial management is to asses the situation and identify where debts or cash outflows occur.  One can never acquire more cash if one constantly has the cash being sucked out through expenses and liabilities (unless you have a very high inflow of cash, but this is a non-efficient state).  Similarly, if time is constantly being drained, one can never become ‘time-wealthy’.  Thus comes the first step of acquiring more time:

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Some have said:

“It’s not about where you are, it’s where you’re going.”

Others have said:

“It’s not where you’ve been, it’s where you are.”

In business, I like to say:

“Where you are - Where you’ve been = Where you’re going”

(in addition to the above two.)

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    Just as you should check your vital signs of pulse, cholesterol, and weight on a regular basis, you should check your company’s vital statistics on a regular basis, and recommend a new course of action should anything be over or under what it should be. This article will consider the Vital Financial Statistics, also considered the Chi flow (or bloodstream) of the company - Revenue, COGS, Expenses, and Net Profit.

1. Revenue ($)

    Everything that puts money into the bank as a result of a product or service being sold. Needless to say, if you aren’t putting money in the bank, nothing else matters. Marketing and sales most directly affect this vital number.

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