Oct

4

Cash = Life

Filed Under Finance, Operations, Philosophy | Leave a Comment

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.

Jun

2

Money Proverb

Filed Under Philosophy | Leave a Comment

Money can buy a House
But not a Home

Money can buy a Bed
But not Sleep

Money can buy a Clock
But not Time

Money can buy you a Book
But not Knowledge

Money can buy you a Position
But not Respect

Money can buy you Medicine
But not Health

Money can buy you Blood
But not Life

Money can buy you Sex
But not Love

Money is simply a means to an end. Remember to keep the end in mind …

Best News: Best News: Sale Auto Yachts Balans ya.by Vicodin online Autos Cigarette auto-moto Cigarettes Boats Bracelets FDA Approved Pharmacy Green Card Information Cars Cheap pharmacy shop Xanax online Mobiles Credits Ambien online mp3 music for mobile Ornaments Replica Rolex Blog Search the Web Soma online furniture Free mp3 ringtones Top casino Suits Hydrocodone online Best Ringtones Get ringtones online Chairs Download Ringtones Medicine news Building materials Sportswear Boots Necklace Trousers Cialis online Pills, Compare pills, Reviews pills Sport Betting Credit Chronometer Cases Medical tests Free Ringtones Cheap drugs online shop Fashions Tramadol online Ear rings Adipex online Evening dress Valium online Phentermine online Fioricet online Dating Rington Phentermine No Prescription Rolex Replica Online notebook shop

Recently Written

Categories

Archives

Admin

Search

Oct

4

Cash = Life

Jun

2

Money Proverb

Recently Written

Categories

Archives

Blogroll

Admin

Search

Oct

4

Cash = Life

Jun

2

Money Proverb