Have you ever heard the saying “If you spend money on fish sauce, buy fish sauce; if you spend money on salt, buy salt”? It sounds like a simple saying, but behind it lies a golden rule, vital to any business, especially in challenging growth periods.
Meet Mr. Vu Phuong - Financial Director, Saigon Food Joint Stock Company
Recently, in the latest podcast episode of The CashFlow, host Thuy Vu had an in-depth conversation with Mr. Vu Phuong, CFO of Saigon Food Joint Stock Company, an expert with more than 20 years of experience "fighting" on the financial front. Through the conversation, we can see practical perspectives and hard-won lessons on cash flow management when a business is out of balance financially.
In the context of an ever-changing economy, maintaining a healthy cash flow is always a top priority for every business. Especially for businesses that are on the rise, eager to expand, the problem of balancing growth and financial management becomes even more difficult. Many businesses fall into a situation Sales increased, profits also increased, but cash "evaporated", leading to unpredictable consequences, even pushing businesses to the brink of bankruptcy.
What is the cause of this “unbalanced growth”?
According to Mr. Vu Phuong, one of the common mistakes that businesses often make is not following the principle of "buying fish sauce with the money you spend, buying salt with the money you spend".
Simply put, this principle means that Businesses need to use short-term capital to cover short-term needs and absolutely do not use short-term money to invest in long-term assets.
Imagine, daily and monthly sales revenue is a short-term capital source for the business. Normally, this source of money should be prioritized to pay short-term debts such as employee salaries, rent, daily operating expenses, or short-term payables to suppliers.
However, many businesses, especially "newbies" or those who are too optimistic about growth, "spend too much money", Use this short-term source of money to invest in long-term projects such as building factories, purchasing machinery and equipment, or even investing in real estate and stocks with the expectation of quick profits.
Common mistake: "short-term gain to sustain long-term"
Mr. Phuong clearly pointed out: when short-term debts are due, businesses will fall into a passive position. severe cash shortageAll short-term capital is "buried" in long-term assets, which have much slower liquidity.
The business no longer has enough money to pay employees, suppliers, or repay bank loans that are due. The illiquidity situation will quickly escalate, directly threatening the existence of the business.
A typical example that Mr. Phuong shared in the podcast is the case of a business importing raw materials. When predicting that raw material prices would increase, the CEO decided to import double the normal quantity. The problem is that the payment for that huge shipment is in cash, while the business extended the payment period for customers to move inventory faster.
The result is Inventory skyrocketed, receivables also increased, but cash was "frozen". The business fell into a situation where it had no money to pay salaries, warehouse costs, and transportation, forcing the CEO to run around and borrow money everywhere, even calling for investment to save the situation. Luckily, there were investors who saw the potential and invested in time, but that was only a rare lucky case.
So, how to identify the risk of financial imbalance early?
Mr. Phuong revealed a very noticeable sign: “Sales increased, profits also increased, but conversely, inventory also increased, accounts receivable also increased, customers demanding debt, suppliers demanding debt also increased, but only one thing did not increase, that is liquidity, which means money did not increase.” This is a clear “red flag” that shows the business is having problems managing cash flow.
In addition, Mr. Phuong also shared about important financial indicators to help assess the financial health of the business, such as: Current ratio (total current assets/total current liabilities) and quick ratio ([total current assets – inventories]/total current liabilities). If these ratios are <1, it is a warning sign of financial imbalance risk.
To "unblock" cash flow and manage effectively, Mr. Vu Phuong has proposed practical solutions that businesses can apply immediately:
- Review and renegotiate payment terms with customers and suppliers: The goal is to shorten the collection period and lengthen the payment period reasonably.
- Tight inventory management: Optimize inventory levels to avoid tying up too much capital. Review your supply chain to identify materials that can be ordered quickly, thereby reducing the amount of inventory needed.
- Carefully consider investment strategies: Avoid using short-term funds for long-term investments. If necessary, consider options such as asset sale and leaseback to free up immediate cash flow.
- Optimizing capital efficiency: Apply the “3C” principle: cost control, investment efficiency and capital efficiency. Ensure quick cash flow, tight cost management and investments with the highest return.
- Increase charter capital: If the debt-to-equity ratio is too high, increasing charter capital will help the business have more stable equity capital, reducing debt pressure.
- Financial system transparency: Record all transactions completely and accurately to have a clear view of your financial situation, thereby making decisions based on data, avoiding emotions.
Especially for SME businesses, Mr. Phuong re-emphasized the principle of "buying fish sauce with every penny, buying salt with every penny".
Never use short-term cash from sales to invest in fixed assets. Instead, focus on Accelerate debt collection, strictly control costs and optimize capital efficiency.
Regarding the problem of balancing growth and cash flow management, Mr. Phuong shared that there is no standard formula, but businesses can choose a growth model that suits their resources. There are businesses that choose cautious growth, expand step by step, ensuring each new business unit is operating efficiently and profitably before expanding further.
There are also businesses more adventurous, expand rapidly but still have control and be ready to adjust plans if needed. Most importantly, must strictly control cash flow and efficiency of each investment.
To forecast cash flow accurately, Mr. Phuong believes that businesses need to build a synchronous financial management system. Annual Business Plan (AOP) and integrate it with business management software such as ERP will help businesses predict future cash inflows and outflows, thereby creating timely response plans. Without specialized software, businesses can still use Excel to build cash flow forecasting models.
Finally, regarding financial investment strategies for sustainable development, Mr. Phuong gives advice depending on each stage of business development:
- Startup: Minimize investment in long-term assets. Prioritize product idea development and seek manufacturing partners to minimize initial investment costs.
- Growing Business: Focus on operating cash flow. Consider appropriate dividend and reinvestment rates. Investment in fixed assets should be based on resources from profits and depreciation. Have a plan to raise medium and long-term capital to finance these investments.
- Stable business development: When the cash flow is strong, you can think of profitable investment channels such as M&A of businesses in the same industry, investing in term deposits, bonds, stocks, or real estate (liquidity needs to be considered). It is important to build financial reserve fund to deal with unexpected risks.
Mr. Vu Phuong's sharing in the latest podcast episode of The CashFlow is truly a valuable "tonic" for anyone who is running or interested in the financial activities of a business.
Principle "Whatever money you spend on fish sauce, buy fish sauce. Whatever money you spend on salt, buy salt." It seems simple but it is a compass that helps businesses stay steady, overcome challenges in the growth process and build a solid financial foundation.
Don't miss more insights and real-life stories from Mr. Vu Phuong - CFO Saigon Food in the latest podcast episode of The CashFlow.
Visit now Bizzi Vietnam youtube channel to listen to the whole conversation and equip yourself with the most effective cash flow management knowledge!
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