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Edition 239 – Cash = Choices

Written by Dean Robinson.

The sharemarket is all over the shop at the moment. One day up, the next day down. Public company returns are impacted by COVID 19, positively or negatively, dependent upon the industry.

Interest rates are beyond lousy on bank accounts. When the Reserve Bank’s Cash Rate is 0.25%, it’s not getting better any time soon. If you actually checked your bank account at the moment, you might just find the monthly fees and charges are higher than the interest returns – so you’re actually in negative interest territory.

Yet, what we don’t see are the phenomenal returns that are generated inside of family businesses, each and every week.

Last week, when meeting with one of my family business clients, we discussed the investment rate of return on one of their business initiatives was 122% pa. Yes, you are reading that correct – One Hundred and Twenty Two Percent.

This is a business that for a long time has followed my mantra of ensuring they have 90 days of operating cash invested in the business. 

In my observations, the businesses that have performed strongly over the past 6 months have either been:

  1. High in cash; or,
  2. Low in debt; or,
  3. Both.

By having significant cash reserves, this family business is able to make choices about what assets to purchase in their business, how they can be invested and how much to charge as a return. If you think 122% is a ridiculous rate of return, I truly believe the return could be substantially higher, so smart are their business ideas and so effectively have they positioned themselves in their market.

Another family business is operating in an industry that has been impacted negatively by COVID 19 and were in a scenario of bumping along with very little activity for the 4 to 6 weeks in April and May of this year. However, they went into lockdown with a strong cash war chest and, ever since, have been very frugal in terms of:

  1. Managing expenses.
  2. Negotiating supplier discounts or preferred trading terms.
  3. Banking all the Government Stimulus payments they have received.

Their cash war chest is almost 100% higher than it was in March 2020, which has enabled them to invest in higher skilled staff which, not surprisingly, are starting to generate significantly higher sales and profits than the equivalent period in 2019. Having the cash war chest has also enabled them to invest time into re-engineering their business direction and bringing their staff along with them on the journey. Their approach in their industry is ground breaking and having substantial cash reserves means:

  1. They can pay higher salaries to well qualified people.
  2. They can invest in new equipment.
  3. They can devote time to intensively training and developing their staff.
  4. They can invest in broadening their stock range to cast a wider net in their local economy.

So, today, when you dial into your bank account, what do you see? Is it lots of cash that generates lots of choice about what you can and can’t do in your business? Or, is it tight, has been tight for a while and you’re already expressing concerns around what 2021 may look like from a cash perspective?

If you’re thinking, 90 days is a lot of cash to have sitting in your business, consider this – businesses in Victoria will have experienced 56 days of a Stage 4 lockdown, assuming the state comes out of it, by late September!