Without enough cash on hand to pay debtors, wages and other expenses, businesses will inevitably go under, writes Caroline Madden

'ONE PIECE of business advice a budding entrepreneur should always listen to is to watch the cash flow." This is one of the secrets to business success shared by Tom Brennan, co-founder of pharmaceuticals company EirGen, on this week's visual case study ( www.irishtimes/business/education/).

Given that Eirgen specialises in manufacturing high potency drugs used in the treatment of diseases such as cancer, it’s not surprising that Brennan uses a rather stark medical analogy to explain just how important it is to control a company’s cashflow.

“Net profit in your business is all very well, but cashflow is everything,” he says. “If you don’t have net profit, it’ll be like cancer – it’ll be slow, but there’s a good chance it’ll get you eventually. But lack of cashflow – it’s like a heart attack; it’ll stop you in your tracks.”

So what exactly is cashflow and why is it so vital to the survival of a business? The term cashflow refers to the movement of money in and out of the business. Without enough cash on hand to pay debtors, wages and other expenses, businesses will inevitably go under.

In the past, many small and medium businesses relied on loans or overdraft extensions from their bank to tide them over any short-term cashflow difficulties. But, because of the ongoing liquidity crisis, many businesses are finding that this option is not open to them at the moment, which means that cashflow management is even more critical than ever.

In order to ensure their survival, businesses are having to minimise their “cash burn”. This involves reducing their requirement for cash by eliminating waste in all its forms, and paring right back when it comes to costs and overheads.

In light of the difficulties in getting external funding, business should also try to build up and maintain their own cash reserves.

According to Patsy Carney, co-founder and managing director of EirGen, the key to business success lies in putting together a formal business plan.

He recalls that while he and Brennan were studying for a Masters in Business Administration (MBA) in University of Limerick, as part of an entrepreneurship module they had to draw up a formal business plan.

“We used the formality of putting that business plan together to really have a good look to see if there was a business in what we were thinking about,” he says. “Make sure you have a business to actually put together and get off the ground before you go putting any money into it.

Having a formal business plan in place is particularly important if applying for financial backing, whether from a mainstream lender, a venture capital firm or a business support agency. Enterprise Ireland recommends that a business plan should cover:

- the opportunity spotted by the entrepreneurs

- their background and experience

- market information

- the competitive advantage that the new business will have

- perhaps most importantly, financial projections and the amount of investment required.

In breaking into the pharmaceuticals industry, Brennan and Carney had to overcome many regulatory, technical and financial hurdles that come with the territory.

“We had to raise a lot of capital because the equipment for manufacturing the products that we have is very, very specialised,” explains Brennan. “It’s very capital-intensive to get a business like this in place.”

But they both agree that the hard work and effort of setting up their own business was well worth it.

“It’s very different when you’re working for yourself,” says Carney, who has gained a huge amount of experience in everything, from raising finance and building a facility to developing products and building up a customer base.

Meanwhile, Brennan notes that although his area of expertise lies in the production side of the operation, because EirGen is a small organisation he has been involved in most aspects of the business, and has discovered that he gets “a kick” from the business development side of things.

This involves attracting potential customers, showing them around EirGen’s facility and getting new customer agreements in place.

“Clinching the deal – that’s the bit that you get the buzz out of definitely,” he says.

Support Panel: EirGen

This week’s case study ties in with the following areas of the Leaving Certificate business studies curriculum:

Unit 2: Enterprise – this case study examines various aspects of enterprise such as starting a business, manufacturing and managing revenue and cashflow.

Unit 5: The Business Plan – the importance of having a formal business plan in place is discussed.

In the Leaving Certificate Vocational Programme, this case study provides links to:

Unit 1: Enterprise Skills

Unit 2: Local Business Enterprises

Unit 4: An Enterprise Activity

Business Education Series

THE BUSINESS Education Series provides second-level students with an insight into key business issues. The entire series can be viewed at www.irishtimes. com/business/education/

It is intended to complement a series of 12 visual case studies available on the Ernst Young Entrepreneur of the Year programme’s new online business education channel, www.eoy.tv.

Teacher support notes are also available here. Students can watch the clips at home or in the classroom. The case studies have been developed in collaboration with the Business Studies Teachers’ Association.

Each case study is directly related to the Leaving Certificate business course and links to the curriculum are outlined here each week.

Series concluded