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Cash is King!

July 31, 2007

by John Finlay

“Cash is King!” I heard this phrase for the first time this week. The phrase references the fact that at the end of the day, what matters most to the survival of your business is how much cash is left in your account at the end of every day. It doesn’t matter how much your revenues could be tomorrow, if your cash is negative today. It seems so obvious, yet businesses often fail because they forget this.

Take Eastwind Trading (a Harvard Business case) as an example. Their company encumbered a large amount of debt and investor equity to start up the business. The business opportunity had potential to be very profitable, but they could never get to that point because in the beginning they depleted their cash reserves so much faster than they received their revenues. Instead of trying to cut costs, they tried to get more investor funding. In the end they went bankrupt because they didn’t manage their cash flow.

Contrast this with the example of the Baby Einsten company (related article can be found here). They funded their business with $10k from their personal savings with the goal to never accrue debt or be under the thumb of an investor. They kept costs to a minimum, and often had to forgo releasing new product or advertising campaigns because they didn’t yet have the cash to fund them. Cash was more than “king” to them, cash was “god”.

Many people feel that they can supplement a negative cash flow with debt not realizing that the end of the heavy chain of debt and credit cards is held by the grim reaper of bankruptcy.

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2 comments

  1. John,

    Great post. I think most entrepreneurs have the idea that they want to keep costs to a minimum and never accrue debt / investors. It is much easier to say than to actually accomplish and it takes a tremendous amount of discipline to tow the line and succeed without it.

    Having said that, most companies who can pull it off are usually much stronger organizations because they have developed discipline and structures that force them to be profitable and focus only on the most important aspects of their business.


  2. […] Cash is King! […]



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