Why are business owners so obsessed with cash? On the surface, this is an utterly moronic question to ask. You need cash to pay for things - employees, inventory, your own living expenses. Of course you need cash. And these thoughts are obviously correct, as a business won't last long without cash in the bank.
But these thoughts are incomplete. There's one thing that people don't always think of that cash - cash in the bank in particular - brings you.
Freedom of action.
What does this mean?
Freedom of action is having the ability to take advantage of opportunities that come before you. In a lot of sectors, there are going to be some chances to buy up assets, personnel, and other businesses at very attractive prices. And the reality is that in most industries, there are opportunities to do this at all phases of the economic cycle. They often come and go very quickly. As we’ve seen throughout the PPP process, at times the banks can’t be a fast source of help. People with liquidity can jump on the opportunities without waiting.
Freedom of action is not getting hosed by circumstances. I’ve talked to dozens of businesses about their situations over the last three months. Some businesses have been crippled by a dip in revenue, and for others it’s not a long-term issue. Why? That second group of businesses had the cash to ride out a couple of bad months. While hopefully nothing like these lockdowns happens again soon, if you have cash to ride out the storm, you don’t have to panic and shift paths just to try to survive.
Freedom of action is getting to scale the way you want to scale. Some businesses have to try to scale extremely quickly because they don’t have the money to go any slower. Scale comes with a lot of complexities, and for a lot of businesses it’s better to take it at a steadier pace. The house built too quickly can easily collapse.
So cash isn’t about making ends meet to have spending money after you pay the bills - cash gives you options at every stage of the future. Accumulate cash wisely - it’s the mindset of those who are building wealth.
And if you don't know how to build your war chest? Let’s talk.