If You Eat Too Much Cheese, the Trap Will Spring!
If there is more than one child in the family, there is a high probability that they are significantly different from each other. Their demeanor, intellect, interests, and athletic ability can differ, often a lot. When it comes to handling money, the differences between siblings can be readily apparent. On their birthday, each child receives five dollars from an uncle or aunt. One child immediately places the money in their piggy bank. The other child waits five minutes before requesting someone take them to the store so they can buy something with their newfound wealth. Neither choice is a big deal until it’s time for the family vacation. During the vacation, both children find items they wish to purchase. One has the money, and one does not!
Entrepreneurs can be 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 a rock or a firm financial foundation. He or she takes a minimum salary and saves profit to reinvest in the company as it grows. This person uses discipline and limits their debt with the mindset of becoming debt-free as soon as possible.
Entrepreneur #2 builds their business on sand or a weak financial foundation. Any profit is immediately sucked out of the company via increasing their salary, buying toys (boat, place on the lake, etc.), and/or buying a larger house in a better neighborhood. Buying trucks and equipment is a snap. The owner simply calls the banker, who immediately approves the loan. At some point, things slow down a bit, and cash flow becomes tight. It’s time to draw on that line of credit again…until it’s maxed out. Add to the mix pesky suppliers who want to be paid. Hey, we are only 60 days behind, so what’s the big deal?
Both businesses look good to the passerby. They are growing and have great reputations for doing quality work, and the owners are well respected in the community.
One day, it begins to rain. Storms can come in many forms in the business world. Sometimes, it’s actually 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) that you pay off the line of credit within thirty days. Sometimes huge rainstorms come in the form of national economic collapse, like in 2008 and 2009. And 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. The mouse trap represents cash flow in your company. Cheese represents real cash. The mouse is the company owner. Cash flow issues, regardless of the cause, are always lurking, just waiting for the company to run out of money. The trap is set, ready to be sprung.
Remember, the cheese represents cash. If the cheese isn’t touched, the trap will not spring. Cash flow is held at bay.
The owner is the mouse. As long as the mouse leaves the cheese (profits/cash) alone, all is well. Cash flow problems lurk, but they are not causing a problem as long as the cheese is not touched.
Now, assume that the mouse cannot fight temptation. However, he has read the instructions on the mouse trap, and he realizes that it is safe if it is not significantly moved. The mouse really wants some cheese. (It’s a small boat, and the family will love it! Or it’s just another small withdrawal on the line of credit.) The mouse is careful not to upset the trap. Wow, that cheese tastes good, and besides, there weren’t any serious consequences to the additional debt (just a small bit of cheese). The mouse takes another bite, and then another, and before long, the trap is sprung. Boom! Cash flow becomes critical, and the cheese is gone.
There is nothing wrong with enjoying the fruit of your labor. You should! You worked hard to get to this point. The lesson is not to eat too much cheese. Realize that the cash flow trap is ALWAYS set. Eating too much cheese will spring the trap, and once the trap is fully sprung, few mice survive!
- If You Eat Too Much Cheese, the Trap Will Spring! - April 11, 2023
- Back To Square One - September 27, 2022
- How Much Profit Should A Company Make? - July 21, 2022
Posted In: ACCA Now, Leadership & Planning, Money & Operations, Uncategorized
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