Every startup that comes into being has an aspiration to grow rapidly and place itself next to the giants of the industry. No one wants to get stuck in one place for too long and struggle endlessly. And, while aspiring to reach high, startups make a mistake that drags them even down. Ignoring the cash flow. It’s great to grow a business however it’s worse to have a business that is growing but not generating cash. Regardless of how the times have changed, cash is the king for any business even today.
One can argue on the ways to acquire cash. You may make great profit and generate cash reserves which a bootstrap startup does. On the other end, a “modern way of doing business” pushes startups to dilute stakes, bring investors on board and let them infuse the cash. The last resort is to take debt from friends, family, or financial institutions. You can choose any of these, but the end goal remains to be “getting cash to run and grow business.” Again, “cash’ is the keyword here.
Why Cash is the King, still…
Cash, by a laymen’s language, means, currency notes in hand. That is where most are mistaken. Cash does not mean currency notes alone. It means the amount you have in your bank, the term deposits, and any other instrument that can be liquidated quickly to generate cash. For a brief moment, you can consider it as a form of capital that is vital for a startup.
Let’s see how cash in hand (or cash) can be a deciding factor in a startup’s journey:
Enables Growth Opportunities:
Growth is vital for any startup. Once you’ve set the foundation right, you will seek opportunities to expand. That’s where cash comes into the picture. Having good cash at disposal, a startup can grow rapidly compared to those who don’t have cash. It keeps you prepared for any opportunities created by a sudden change in external factors such as a change in consumer behavior or government regulations. While cash-starving startups have to spend time managing resources, a cash-rich counterpart can seize the moment.
A sustainable business model has to be ready for adverse events resulting from any external factors. Be it slowdown in business or fierce competition, a business has to be prepared to meet its bare minimum expenditure in any circumstances. Starting from employees’ salaries to the maintenance of equipment or office rent; everything needs cash. You may enjoy a great reputation among your vendors but there may come a time they put the need for payment over good relations you share with them.
Allows To Take Risk
A founder needs to take bold and courageous decisions to grow and grow fast. That risk-taking ability makes more sense when the bottom line of a business is secured. Every business risk needs additional resources, primarily cash. Cash allows a company to go on a hiring spree or acquisitions, can afford to lure customers by selling your products at minimal or no profit, it helps in making the supply chain more effective and functional. Contemporary markets demand constant innovation that can be a risky and costly affair that may need immediate cash.
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Goodwill in the Market:
More often than not, business-to-business purchases are done on a credit basis. A startup doesn’t have a legacy, so it needs to take a few extra steps to win trust in the market. Goodwill pays your bills until you pay them with money. But, no seller will give credit to a buyer whose payments are uncertain. If a company is failing to pay vendors on a timely basis, getting further credit becomes next to impossible and it eventually puts a question mark on its survival.
Building a startup is a capital-intensive exercise. If a startup doesn’t want to dilute ownership, the only way left is to take debt. It may require approaching financial and non-financial institutions for credit. Such institutions take a deep dive into the company’s health, which may include an analysis of cash flow and cash reserves. A company that is running dry on cash is not a favorable customer for lending businesses. So, it becomes important for a startup to maintain good cash flow in order to raise capital when it needs.
No one likes the word “emergency”, be it personal life or professional. However, it is a bitter yet real part of life. These emergencies may come in form of natural calamities, wars, disturbance in the supply of essential products and services, or say a pandemic. It’s a challenge for a startup to operate under such scenarios. That’s a time when the availability of cash can act as a life jacket. Even if cash doesn’t solve all the problems, it makes every solution look possible. A cash-rich startup can recover from damages very quickly.
We live in a competitive business world where every company is challenged by other companies. Startups, by nature, are supposed to be challenging the established companies. While the existing companies have a great advantage over the startup, a startup can become disruptive with the right attitude and strategy. However, it needs a lot of capital when fighting a giant. Cash allows a startup to take a leap of faith.
Is Cash Everything?
Generating cash cannot be an ultimate goal of a startup but that is the bare minimum it needs. As a famous quote says, “Revenue is vanity, profit is sanity, but cash is the only reality”. When it comes to running and expanding a startup, cash opens doors no other thing can and that’s why it becomes a great tool to have.