Surplus Cash: Too Much Money Harms Business

How to watch your cash flow now so you don't end up in a bad situation later.

“Money is a very excellent servant, but a terrible master.” P. T. Barnum

I find it strange, that potential entrepreneurs who have difficulty balancing their household checkbook or managing their personal finances, believe they can manage a business. If they lack an understanding of the fundamentals of money management, they will soon discover that their ability to survive in business will require more than simple record keeping. They will quickly become aware that success demands knowledge of basic business finance.

Are you aware that you can fail in business if you have too much money; that you will fail if you run out of money; and that you may fail if you do not know you are losing money – situations successful entrepreneurs recognize and correctly deal with to avoid bankruptcy.

Too much money may seem an unusual topic in a column about entrepreneurship, but having more money than you need to establish your business can lead to your failure. It dismisses any sense of urgency or the immediate need to become profitable. With the extra dollars in the checking account, the owner feels little pressure to work weekends or make the usual sacrifices necessary for success. Unrealistically, the new entrepreneur can enjoy the fruits of success right from the start, or, so he or she thinks!

Too much money permits premature expansion and unnecessary expenses, a common cause of failure. If the money is available, the owner may be tempted to add staff, add facilities, expand product offerings, incur unwise promotional expenses, offer customers generous credit terms, and even spend on lavish customer entertainment.

Even well established companies with too much surplus cash have been known to become arrogant and indifferent to their customers – losing market share and even eventually declaring bankruptcy. These companies lost their sense of purpose and the need to satisfy their customers.

Roger’s Money:

Roger Simpson, a young executive employed by a large chain of paint stores, had for some time wished to own a business. After inheriting a substantial sum of money, he left his employer, sold his home and moved to Florida to open his dream business as a distributor of painting equipment.

Roger wanted the best of everything for his new company. One of his first acts was to sign a five-year lease for a new building in an upscale industrial park. Next, he proceeded to design luxury offices, install new furnishings and fixtures, and buy the usual office equipment. To provide repair and warranty services for his customers, he outfitted a complete shop with the best of tools and equipment. He arranged with various manufacturers to become a distributor of equipment and repair parts. He invested heavily in inventory. His experience with his former employer strengthened his desire to be all things to all customers.

Roger then hired his father-in-law, who was unemployed at the time, as a salesperson, his wife (now his ex-wife) as the office manager, and two local young persons as clerks to work in the store and shop. He found a nearby attorney and accountant. Everything was now in place. All he needed was customers.

To promote his company, he printed brochures, catalogs, business cards, and assorted advertising materials. He even contracted with the phone company for a half-page ad in the yellow pages. Slowly, the business began to develop.

Roger was aggressive in soliciting business. He and his father- in-law believed in cutting the price to make a sale, and, if necessary, they offered generous credit terms to close the deal. The philosophy of the company was simple: Make the sale and worry about the profits later. Roger was determined his company was going to be an important distributor. His role model was a large competing distributor that appeared to have plenty of money and inventory. This competitor maintained a very aggressive posture; their goal was to dominate their market. Roger was convinced he could compete.

After a few months in business, Roger started to experience cash flow problems. His slow-paying customers, his inflated inventories and his excessive expenses all contributed to a significant cash shortage. Rather than run the risk of alienating a past due customer or cutting back on expenses, Roger bailed out his company with more money from his inheritance. As long as Roger had the money available, he was able to sustain a successful image and keep his company alive. It was easier to go the bank and transfer funds to his business account than make tough decisions. His money allowed him to postpone his problems.

The day it ran out, Roger’s life became a nightmare. He was unable to pay his bills. His wife had little tolerance for frugality and filed for divorce. His father-in-law quit. In addition, his vendors were threatening to sue. Roger was broke and in debt. He was forced to sell a part of his company to raise money keep it going.

(C) Copyright 2001 Dr. Paul E. Adams. Syndicated by Paradigm News, Inc.

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