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A few business analysts and some prominent publications did highlight the cash reserves whenever the annual numbers came out. They marvelled at how consistently they kept growing and how committed Microsoft was to adding to them. Some said it was typical Microsoft paranoia and that this cash reserve could be put to better use, put back into the business, even given away as charity because it made Microsoft look greedy. But it was there for a reason and it was explained diligently by Microsoft management whenever someone actually asked: this was their war chest for the future.
And it worked. In the cut-throat environment of Silicon Valley, the suffocating atmosphere of government anti-trust trials and the fickle setting of a changing consumer market, Microsoft used its war chest to fend off competitors, defend, grow, consolidate and survive. Microsoft's cash reserve has kept the company relevant and made it a behemoth to be reckoned with all these years later.
Prioritising a cash position
Every small business needs to make a similar commitment to its cash position. In the pursuit of growth objectives there are so many factors in play that it can become difficult to prioritise. Structure and discipline mostly take a back seat to entrepreneurial spirit and the zeal to grow the business. It is a question of perspective. If a small business owner realises the long term potential of having a cash management strategy, then it is easier to implement and commit to.
In a simpler sense, it is the same logic that we use when committing to a personal savings account. We are building a nest egg for the future. We are programming ourselves to be disciplined and put aside a certain portion of our earnings, sacrificing for the short term but realizing the benefits for the long term. This is a buffer and an asset, whether it is for a child's college tuition, an unfortunate job layoff or an optimistic retirement plan at age 45.
Use the same concept for a business cash reserve. Implement a strategy that looks to put aside a portion of earnings each month, each quarter or each year and stick to it. It will be difficult, it will require immense discipline, and it may not even make sense sometimes when you are struggling to pay bills and trying to keep costs down. But the benefits will show. Even if you have only been doing this for three months and suddenly an extra variable cost arises that needs to be covered in order to ensure delivery of a service or product, you are able to tap into the cash reserve pool.
Dynamic strategy
The key is to keep the strategy dynamic. Maintain a minimum cash level at all times and add accordingly; increase this minimum level according to the amount being built up and the health of the business. If at times there is an urgent need to tap into the cash reserve, feel free to do so, keeping in mind the minimum level and the overall objective.
Implementing a dynamic cash management framework structures a company without committing to tedious accounting procedures, complicated income or cost models and the feeling that one is becoming 'too corporate'. A cash reserve is simple and can fit into the independent, free environment of a small growing business. All that it requires is creative addition and subtraction. No need for an algorithmic computer model!
In the current economic environment with the results of the credit crisis still lingering or just beginning to fade, one can see a certain type of person and company coming to the forefront. They are inquisitive, looking for deals, looking to expand, gaining greater market share, taking greater initiative and sounding strong and positive. They look at the recession as an opportunity, a chance to move to the next level.
There must be a multitude of reasons why they are positioned so well right now: excellent product, an untapped market niche, prudent debt management and greater margins all may play a part. However, do not be surprised that when you look closer, they all have one consistent trait: A healthy cash reserve and a dynamic cash flow.
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