Article 4 – Cash – the four-letter word to focus on
by Tan Thiam Hock
As with all successful entrepreneurs, I think I possess great timing when it comes to starting a new business. When I started my first trading company in May 1985, the Malaysian economy was sliding into a massive recession. Yup …. just great.
The largest departmental and supermarket chain store at that time, Emporium Group, collapsed with a massive debt of RM260mil (RM2.6bil present value) owed to suppliers. The consequences of the bad debt, through a domino effect, on the supply chain were extensive. Emporium could not pay the apparel distributor who could not pay his garment manufacturer who could not pay his knitting and dye supplier and raw material suppliers and so forth. Many entrepreneurs went bankrupt overnight.
Then I went into the imported cosmetic business in 1996 and in 1997 came the Asian Financial Crisis where the US dollar appreciated from RM2.5 to RM4.8 against the ringgit. This was a financial crisis never experienced before in Malaysia. Wonderful timing indeed.
The local conglomerates who took US dollar loans nearly collapsed. Business was difficult as cost of imported goods kept going up. After you sell, you lose money. If you don’t sell, you lose more money. Bleeding was daily, no more an occasional monthly affair.
After using up all my meager cash reserves, I had to go hat in hand to my partner for a loan. We managed to pay our suppliers, kept the 36 staff in employment and most important of all, paid the banks.
Just as I was about to throw in the towel, our then Prime Minister brilliantly capped the ringgit at RM3.8 to the dollar. With an available clean trade line from the bank, my company was one of the few SME’s then which could immediately import goods to feed a market starved of anything imported. All the losses were recovered within 12 months and I survived to fight another day.
Cash flow is the blood vessel that carries oxygen to the entrepreneur’s heart. Massive cash flow deficits cause fatal heart attacks and like all heart conditions can be avoided if you understand the importance of staying healthy from day one. For entrepreneur wannabes, cash is the only four letter word that should be in your thoughts all the time, from pre-start up analysis through to planning, execution and closing. All plans and actions must result in positive cash flow.
Positive cash flow means you are generating profits. Surplus cash flow means you can declare dividends. Negative cash flow means a heart attack is imminent (to your bankers) and should be corrected immediately. Zero cash flow means you are on the death bed in need of a life saving transfusion of cash. And trust you me, no banker will be at your bedside holding your hands. You are truly and finally on your own.
All entrepreneurs who have succeeded from a tough beginning will have their favourite tales of fortunes made and lost but no tycoon ever tells you the real story on how they raise start-up capital, made their first fortune, finance their fast track growth and how they are able to get exclusive contracts, concessions and licences. There are many ways to raise start up and working capital legally. From own savings to parents, partners to investors, bankers to ah longs and venture capital to private equity funds.
Personal or family financing is my preferred choice as I can own 100% but then I never had any savings or a rich father.
I prefer partners to investors as partners would be someone I know personally who can contribute expertise or financial support but then again, I have had my fair share of failed partnerships. Like marriage, a solid partnership is built on trust and respect, and has survived through a journey of trials and tribulations.
I was lucky to have had a great partner, Ang for 25 years who was also a mentor and a friend. And not forgetting my wife, Judy who dug trenches alongside and fought many battles together. Those two partners were the pillars of my success.
All businesses need banks to conduct daily cash flow transactions and when necessary as a source for low interest funds. Bankers will lend you money if you can show positive cash flow from your operations. Bankers only worry about your ability to pay back which is dependent on your ability to collect. Always remember, a sale transaction is deemed completed only when payment is made.
Avoid ah longs like a plague. Amongst all entrepreneurs, ah longs have the best cash flow policy. Very high margins. No bad debts. They push hard for collections like your life depend on it. You can run but your family can’t hide. Give Michael Chong a break please. Just stay away from ah longs.
Brilliant business concepts will attract venture capital and they are fairly comfortable with your burn rate if you project positive cash-flow in the foreseeable future. However, when the vision turns blur, they will pull the plug when they realise there is no cash at the end of the tunnel. So make sure you generate cash flow…. fast.
As you approach retirement, you plan for succession of your next generation or you plan to exit. An exit plan has only one objective, maximising your personal cash flow. Either you list your company or you sell it to investors like private equity funds. Both exit plans require an average five years to complete. One plan is carried out in public, the other in private. But the same objective is required for both plans, which is double your effort and triple the cash flow. When the time is right, you can go.
For once, I doubt whether I still possess great timing.