I remember an advertisement promoting a certain brand of gasoline that asked the question, “What’s in your engine?” The message of the ad was that their brand of gasoline was better than the competition. Why? Their brand made the engine run cleaner. When the engine ran cleaner, it was more efficient and needed fewer repairs. Their brand was the choice of “smart” car owners. In the business world, businesses are often compared to engines. The fuel that runs the engines of business is cash. So, I ask you the business owner, “What’s in your engine?” Or in a more straightforward question, “What kind of cash fuels your business?”
Just like there are different brands of gasoline, there are different “brands” of cash. There is borrowed cash (debt), there is investor cash (stock) and there is cash generated from business operations (profit). So, the next question is, “What is the best brand of cash to run your business?” Each brand has advantages that are unique.
Debt allows the existing owners to maintain their current level of ownership. The price paid for debt is in the form of interest paid for use of the money and abiding by the loan covenants and restrictions that may come with the loan. If the business owner expects continued strong cash flow, this can be a good choice.
Stock may require the payment of dividends instead of interest. There are no loan covenants that come with cash from issuing stock. When stock is issued to raise the cash, the current owners are selling a portion of the business. For many small business owners, this option may present some emotional struggles. They might be left with a minority interest in the business.
Cash generated from profit requires no interest or dividend payment. There are no loan covenants, and the owner gets to maintain the ownership of the business. In the long term, cash generated from profit is the best “brand” of cash to run your business. I suggest it is long term brand of choice of smart business owners.
What runs your business? Cash generated from Debt or Stock or PROFIT?