By Tom Grandy
If there is more than one child in the family, there is a high probability they are significantly different. Their demeanor, intellect, and perhaps athletic ability differ, often a lot. When it comes to handling money, the differences are readily apparent. It’s their birthday. Each receives five dollars from an uncle or aunt. One child immediately places the money in their piggy bank. The other child waits perhaps five minutes before requesting someone take them to the store so they can buy something with their new found wealth. Neither is a big deal until it’s time to go on the family vacation. During the vacation both children find items they wish to purchase. One has the money and one does not.
Entrepreneurs are like children in some ways. Let’s look at two of them. Each had an idea and started their own business. Both are successful.
Entrepreneur #1 is wise and builds their business on the rock. He or she takes a minimum salary and saves profit in order to reinvest in the company as it grows. This person uses discipline and limits their debt with the mindset of becoming totally debt free as soon as possible.
Entrepreneur #2 builds their business on the sand. Any extra money they make is immediately sucked out of the company via increasing their salary, buying toys (boat, place on the lake, etc.) and/or buying that larger house in the better neighborhood. Buying trucks and equipment is a snap. The owner simply calls the banker who immediately approves the loan. Things slow down a bit so cash flow is tight. It’s time to draw on that line of credit again…until finally it’s maxed out. Then there’s those pesky suppliers. They are always wanting to be paid. Hey, we are only 60 days behind so what’s the big deal?
Both businesses look good to the passer by. They are growing, have great reputations for doing quality work, and the owners are well respected in the community.
One day it begins to rain. Rain can come in many forms in the business world. Sometimes it’s literally raining, day after day, and production gets behind. Sometimes the bank the company has used for fifteen years gets bought out and the new bank requests (requires) you pay off the line of credit within 30 days. Sometimes huge rain storms come in the form of national economic collapse like 2008 and 2009. And guess what? Sometimes the storm comes in the form of a virus.
Storms will come in one form or another. The question is not whether the storms will come, that is a given. The real question is whether your business is built on a rock or on sand. One will survive the storm, the other may not. No matter what form the storm may take, the way out is ALWAYS paved with cash. No cash – no path!
Think about a mouse trap for a moment. In this scenario the mouse trap represents cash flow in your company. Cheese represents real cash in the bank. You, as the owner of the company, are the mouse. Cash flow issues, no matter the cause, are always a danger just waiting for the company to run out of money. The trap is set and ready to be sprung.
Remember in this example the cheese represents cash. As long as the cheese (money) isn’t touched, the trap will not be sprung and cash flow problems are held at bay.
The owner is the mouse. As long as the mouse leaves the cheese (profits of the company) alone, all is well. Cash flow problems are still a danger but they are not causing a real problem as long as the cheese is not touched.
Now, let’s assume the mouse (owner) can’t fight temptation. He has read the instructions on the mouse trap and realizes the trap is safe as long as it is not significantly moved. The mouse (owner) really wants some cheese (cash) (it’s a small boat and the family will love it or perhaps it just another small withdrawal on the line of credit). The mouse (owner) is very careful not to overly upset the trap. Wow, that cheese (cash) tastes pretty good and besides there weren’t any serious consequences to the additional debt (just a small bit of cheese (cash)). The mouse (owner) takes another bite, and then another and before long the trap is sprung! Boom, cash flow becomes critical and the money isn’t there.
There is nothing wrong with enjoying the fruits of your labor. You should, you worked hard to get to that point. The lesson is to not eat too much of the cheese (cash). Realize the cash flow trap is ALWAYS set. Eating too much cheese (cash) will spring the trap and once the trap is fully sprung…few mice (owners) survive!
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