How is Cash Management Like Skinny Dipping
Aug 11th, 2009 | By Jose DeJesus MD | Category: BusinessIn a recent article paraphrasing Warren Buffet, Jason Calacanis said ‘It’s only when the tide goes out that you know who is naked’. The quote he paraphrased, from 2007 is “It’s only when the tide goes out that you learn who’s been swimming naked.”, and as it’s been pointed out in several places, that’s a very apt metaphor for the market recently. What can we learn from this and where are the opportunities that this presents? See the full article for details:
Positive or Negative?
A lot of people see the quote, and the paraphrase as negative, that when things get hard, people leave because they’ve got no resources to ‘cover’ themselves, but there’s a positive aspect to it too – it’s about 30 seconds after everyone see who is ‘swimming naked’ that you see who is dedicated to their business, who is diving right back in again, and starting their next swim.
The tide has well and truly gone out though, and a lot fewer people are diving back in, so the question might either be ‘Am I brave enough to swim again?’ or, similarly, ‘I think I found a market for swim-wear’.
Your own Swimwear
Stretching the metaphor a bit, it’s easier to see whose business is weak and which are the stronger ones when the tide goes out. If you see a floundering business, you may want to take the opportunity, while things are ‘down’ in the market, to invest, or you may instead decide to play it safe and stick with businesses that have plenty of cash and good positive cash flow. Public companies in the US are required to disclose their financial statements quarterly, and while an operating profit is important, it’s also important to see that the level of cash and other current assets exceed current liabilities, and that the ratio of current asset over current liabilities increases over time.
Are you a ‘Naked’ Entrepreneur?
Most importantly, though, the question should be – can I afford to do this – when the tide goes out will I care if I’m naked or will I be running back for my towel? If you can honestly answer ‘no, it doesn’t matter either way’ then you’re probably the same entrepreneur that Warren Buffet was watching the last time the tide went out. And if you’re too busy to answer because you’re back in there swimming again, congratulations.
Cash flow planning is one of the most important things you can do to ensure your business survives!
You can be very profitable but unless you have the cash to pay your bills when they are due, your creditors will not be impressed – they want to be paid. At least once a month, look at the prior month’s payments that came in, bills that came due, and accounts receivable that are due you. If collection of accounts receivable is your problem, you have a few options:
– Re-examine your billing and collection policies and processes, and consider your staffing or outsourcing arrangements for these important aspects of your business.
– Consider financing your accounts receivable. There are a few ways to do this, including factoring or through an unsecured line of credit.