First published in the Sunday Times on 11th June 2017.
A restaurateur said to me last week: “You talk a lot about money”. What he meant was that I focus too much on financial matters in board meetings, to the possible exclusion of other aspects of the operation — such as menus, or people, or decor or marketing.
He is right, in a sense. My attention tends to be on the pecuniary aspects of an investment. I have found that if this part of a commercial undertaking is not healthy, then the undertaking itself is not very commercial — and will probably shut down eventually.
Experience has taught me that if the cash is not watched vigilantly, the situation is likely to be worse than you expect. The subject can feel grubby and venal compared to nicer topics, such as new marketing initiatives, but I feel that if I don’t hold management to account, then perhaps nobody else around the table will.
Of course one can obsess about the money too much. I am sometimes guilty of that. I don’t think my concern is driven by avarice or rapaciousness, but rather the bitter experience of seeing many businesses get carried away and suffer the painful consequences.
Too often managers become over-excited by product launches, posh buildings, new customers, flashy advertising campaigns and so on.
They forget that a viable company should show a profit, generate an adequate return on its capital, and make surplus cash so it is able to reinvest. This all sounds rather mercenary, but it is true, I’m afraid.
Simply supplying products people like, or providing employees with a nice working environment, or having a fabulous vision, does not mean an operation is actually a sustainable business. Instead it may well be a folly destined for the scrap yard, or a charity in disguise, subsidised by backers who probably don’t realise they are acting as philanthropists — not investors.
Through careful analysis, talented venture capitalists have to ensure that their own interests are aligned with those of the executives they back.
In my experience, founders start businesses for many different reasons — to satisfy an unmet need, to prove doubters wrong, to provide work, as an act of revenge — but the survivors all learn to respect the importance and utility of money, even if they never worship it.
Of course, many enterprises are what might be characterised as lifestyle businesses — their primary function is not to amass capital for the shareholders or pay them dividends.
Rather, the business fulfils other objectives — an income for the managers perhaps, or status for the proprietors, or a job creation scheme for the local community.
None of these desires is necessarily harmful, and indeed, some yield important societal benefits, but external capital providers need to agree with these aims, and the company itself needs to ensure it generates sufficient funds to reinvest and stay competitive.
Part of the reason why financial results receive attention is because they are calculated and recorded: what gets measured gets noticed. This is both a good and a bad thing. Cash is the oxygen that enables a business to live and it must be rigorously monitored — but it cannot be the only intent of a company.
There needs to be a careful balance between a company’s role as an engine of wealth generation, and its parallel mission to serve customers, satisfy the reasonable expectations of staff, and meet its obligations to the state, such as taxation. Without customers, staff and a state, there is no business.
Entrepreneurs whose sole ambition is to make a lot of money as fast as possible rarely build enduring companies. Their victories are transient and frail. They care too little about quality, are in too much of a hurry, and over time, lose the support of customers, employees and suppliers.
Developing a business that has real worth is a matter of husbandry, a willingness to defer gratification in order to fulfil longer-term goals. Those entrepreneurs who adopt a more thoughtful, holistic philosophy towards capitalism are more likely to succeed. By contrast, hit and run merchants, such as fictional hedge fund manager Bobby Axelrod in television series Billions, see everyone as “cannon fodder”. Such a sordid doctrine is a blind alley.
There are non-financial ways of assessing whether an enterprise has added value — job and tax generation, for example, innovation, reinvestment in the communities in which it operates, training and so forth. Many of these factors can be measured, and they should probably be highlighted alongside the traditional benchmarks, like return on capital employed, when deciding if a business is an overall success. Yet if a company runs out of cash, it cannot achieve any of these other beneficial purposes.
Cash is the ultimate enabler, but it should never be the exclusive end in itself for a business, or indeed for the entrepreneur.