I am not much of a finance person – except for one thing. Tracking cashflow. Because if there is one sure way a business dies, it is because of a lack of cash.
I cannot read financial statements and haven’t bothered to learn how to analyse balance sheets and P&L statements. But what I always track is the cashflow. Cash is the oxygen of every business. Without cash, you cannot pay salaries or vendors. And that creates a negative spiral from which it can be very difficult to recover.
It is possible to be profitable and yet have cash challenges if you do not get your payments on time. In India, this is especially difficult because of four issues. First, customers take their own sweet time to pay – 90-120-150 day payment cycles are not uncommon. Second, salaries, rents and even some vendors expect to be paid on time. Third, statutory payments to the government have to be made on schedule. Fourth, because rule of law doesn’t exist in India (justice delayed is justice denied), higher write-offs are a reality of life.
What this means is that the business needs some working capital. That can either come from past profits or one has to raise it externally. Growth also requires deploying additional capital since there is a gap between money coming in (later) and money going out (early).
That is why in IndiaWorld I was very keen to make the business cashflow positive as soon as possible. In the early days, subscriptions and website development fees sustained the business until advertising took off. We kept a sharp eye on our cashflows to ensure we never would get squeezed for cash.
I had learnt these lessons in my childhood – writing a daily cash diary for my mother. Each month, my father would give her a certain amount for household expenses. At the end of each day, she and I would sit and write down all the day’s expenses under different headings and calculate the amount left for the month. This way, there would be no surprises until the next cash inflow came when my father got paid at the start of the following month.
No proficorn can be built without attention to cashflows from the early days. And once there is a cash buffer available, keep it safe in liquid investments so it is always accessible. Take the risks in business, but not with your hard-earned cash.
Will be continued soon.