Making or having lots of money is not equal to making a profit in business. Most businesses close because of different cash mirages that occur leading to failure to optimise their business. In this article, we are going to identify three different mirages that can occur to a business which then obstruct its ability to operate as it should. The efficiency with which cash is used in a business will also determine the effectiveness of its operational optimisation and the ultimate value a shareholder will receive.
Lots of capital trap
When a corporate starts, it normally has a lot of capital at its disposal, which can seem like a lot of money. So a company could start with $200 million and the managers may believe that they are well on their way to corporate kingdom. This is the first trap of cash. Money can be finished on investments and projects which are not sensitive to return on investment. Every dollar that a company is going to spend must have a return on investment associated with it. It is not about sunk costs; it is about what the company gets out of it. Endless promotions which are done in the name of branding, but lack clear marketing intelligence, are a waste of money.
Business intelligence carries with it a predictive nature on how sales will be generated and costs contained. When that predictive ability is based on a whim, it becomes emotional banter and less of business but a game of Russian roulette. The predictive requirements of any business must be grounded on facts, reality and industrial patterns. Simply spending capital on investment is not a shrewd idea; there must be a real strategy that is bankable.
The big loan syndrome
Just like the capital trap, the big loan is an ego trap in which a business, all of a sudden, is awash with cash in the middle of the year and goes on to spend it on whatever seems critical. Loans come with an interest rate. If the loan says 15%, then your rate of return in using those funds must be able to meet the requirements. Spending is easy because it is just giving things away, but receiving value back is not as easy because no one just gives you value. For a company to succeed in optimising its business model, every loan that the business takes must have a specific plan which has strict parameters for usage. The lack of accountability for these loans can result in the company using a loan in the absence of a return or the ability to pay back the loan in time.
Cash drawer trap
A common trap is the abundance of cash in the cash drawer of the business, which leads to business people thinking that they are making it and that the business is doing really well. The presence of money in the drawer does not anticipate the money required to buy more products, pay salaries and other obligations. The products that we sell as a business come with a cost which must be paid for. Spending money without an anticipation of what is required is a shortcut to insolvency; it is like robbing the future in the present. A business which does not do a cash flow statement is doomed; it is as simple as that. Eventually the business will finish its operating cash flow and start looking for loans and more capital. When one starts a business, there must be an understanding of what requirements are needed to operate the business and how these can be met. Daily cash flow movement must be recorded and known.
Winston Zvirikuzhe is an Assurance executive at one of the telecom companies in Zimbabwe with extensive experience in strategy and performance management, as well as audit, risk and advisory services.
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