Cash is Still King

I spent time this week working on the financial statements of a small company that does very effective cash management.  In this case, the company has a fairly high transaction volume along with peaks and valleys in cash flow, so doing it right isn’t easy.  This reminded me that as much as it’s important for entrepreneurs to be conversant in the best technology for their business, finding the best way to manage cash is arguably equally important.  Borrowing for working capital is still a problem, regardless of large bank proclamations to the contrary.

Bank lending has increased, but there are still many people with viable businesses who want loans and can’t get them. Often, the issue is the type of business.  It’s all about collateral.  If you don’t have it, or it isn’t easy to negotiate, you have a problem.  Even with collateral, a recent New York Times article recounts the difficulties of getting loans from large banks, the timing and red tape that hamper getting an SBA loan, and the growing complexity of loan options.

 

For those looking outside the banking world, it gets even tougher.  As explained on the blog Slingshot Cafe, private funding sources tend to divide the world into two business types.  Venture businesses (as in someone thinks they’re going to make a large “yacht-load” of money) and lifestyle businesses (as in it might make some money, but it’s not the next Google).  If your business falls in the first category, you have a chance at angel or VC funding.  But that’s a small group of businesses.  The remainder, which can include many viable growth businesses (just not hyper-growth) need to get creative.

Adding insult to injury on this capital raising front, we’re not just talking a true small business problem.  A recent Grant Thornton study shows it’s getting harder to get listed in the capital markets.  Since 1997, the number of companies listed on US exchanges has declined 42%, and it’s been a straight line down from the start.  This all has to do with the economics of investment banking making it hard to make a buck (OK a giga-buck) at doing IPOs for less than massive companies.  Another big factor (bad pun alert) is consolidation among public companies.  The study calculations on how many IPOs would be needed to reverse the trend is like reading how long it’ll take to get unemployment numbers down.

That said, it seems impossible that funding for new companies will be a persistent problem.  A side effect of reading Horatio Alger books at a tender age is that I believe there is too much money to be made for capital not to flow to small businesses.  It’s really the reverse argument of the mortgage crisis.  If you underwrite loans carelessly you won’t make any money.  On the other hand, if you don’t make loans except to select few, there’s not much money left in the end either.  Still, as the saying goes, “in the long run we’re all dead”, so in the short run managing the cash you have in your businesses should be on your short list of tasks that must be done today, every day.