At a recent Acton MBA information session, one candidate expressed a deep need for a better understanding of cash. This led to a brief discussion of Bill Sahlman’s “Four Rules of Cash,” taught in our Cash and Valuation course.
Sahlman’s “Four Rules of Cash” are general guidelines for maximizing value.
The rules are:
- More cash is better than less cash.
- Cash sooner is better than cash later.
- Less-risky cash is better than more-risky cash.
- NEVER run out of cash.
More cash is better than less cash. To make more cash, you must make more objective decisions by translating all pros and cons plus benefits and costs associated with a decision into dollars.
Cash sooner is better than cash later. The future and our economy is unpredictable. Focus on projects that pay out quickly.
Less-risky cash is better than more-risky cash. Measuring risk requires a deep understanding of your company’s customers, cost structure, competitive environment, and financial obligations. To measure risk, answer these three questions: 1. How predictable are the cash flows? 2. How sensitive are cash flows to changes in revenues and costs? 3. Who gets paid first?
NEVER run out of cash. Running out of cash means striking out. There is more uncertainty in the world than you think. One of the secrets of entrepreneurship is to have the flexibility to take advantage of unexpected events. This requires patience and liquidity.
These four rules are part of a larger lesson from Sahlman’s “Three Principles of Valuation.” To better your understanding of cash and valuation, play Fistful of Dollars, an Acton Sims game that focuses on cash flow. Then ask yourself, “What specific money-making tools and skills do I need and how will I acquire them if I don’t go to Acton?”
Acton MBA is holding information sessions in Houston on Oct. 14 and Austin on Oct. 20. Click here for more information or to register to attend.
Photo courtesy of velo_city.
Tags: Advice, Bill Sahlman, Cash and Valuation
Posted in Entrepreneurship
Good article but I have a question: What if you have to choose between more cash later or less cash now? I know that involves measuring risk, work, and return on effort, but if #1 (more cash) is the most important thing in the 4 rules, then waiting for more cash is better than less cash now.