John(a start up aspirant) & Michael (a seasoned entrepreneur) are meeting up at a local coffee shop.
John: Hi Michael, how are you? [Shakes hand with Michael]
Michael: Great! how about you chap?
John: Nervous. Because, I have decided to quit my job & start working on my dream project, my startup.
Michael: Oh yes, you were talking about that project the last time we spoke over the phone. But, what makes you nervous? The plan looks good to me. [Sips the coffee]
John: Ah yes! But you know, mine is going to a non-tech startup…
Michael: [Interrupts John] So what? Have your coffee, it tastes wonderful, as usual.
John: Yes [Sips the coffee]. The issue is that I don’t have much of money.
Michael: Trust me, you don’t need much of money for your non-tech start-up only if…
John: [Interrupts Michael] Only if?
Michael: Only if you know how to rotate your money fast.
John: Now, what on earth does that mean?
Michael: [Sips the coffee] Let me explain. So, you are planning a fruit beverage manufacturing business. Right?
John: Yes, till now at least.
Michael: Great! Tell me what will be your initial investment?
John: Not much. Kind of around $2000. I know that’s too low…
Michael: [Interrupts John] The formula is simple. Buy on credit & sell in cash.
John: Sorry, but I couldn’t get it.
Michael: Let me explain you with an example.
John: Yes, please!
Michael: So, to manufacture you need machines, raw material & labor. Right?
John: Seems so.
Michael: Can you get machines & raw materials for a credit of 30 days? You can use industry contacts or use some financial instruments.
John: That won’t be a problem.
Michael: And, wages anyway you need to pay after a month, that’s 30 days again.
John: And, what about other expenses like factory rent?
Michael: Isn’t that also after a month?
John: Yes, 30 days again!
Michael: So, essentially, you have a credit of 30 days for all your major expenses. The first part of my formula got covered: Buy on credit.
John: I see. And, the second part of the formula was?
Michael: Simple. Sell in cash. Do not give credit to your buyers, at least till the time you don’t have strong cash base.
John: OK, but still I am not able to get on how this formula will help me rotate my money fast. Am I missing something?
Michael: We are not finished yet. Please bear with me. Now, let’s understand the logic behind this formula.
John: Sure Sir.
Michael: Since you will be getting major expenses on credit, the $2000 will be an extra cash you have on the day you start.
Michael: As soon you start making sales, you have $2000 + amount of sales you made. Use this money for expenses that increase your sales. Like branding, packaging, marketing, new machines etc. Again, new sales mean more cash. Again, re-invest this extra cash for expenses that increase your sales. Repeat, repeat… After 30 days, not only you can pay your creditors, but also have an extra chunk of cash for next month.
John: It’s like a cash cycle.
Michael: Perfect! Now, you are getting me.
John: [Smiles] I am feeling confident now.
Michael: [Smiles] All the best!