Cash Flow Management is Simple

“The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law” — which states that the number of potential connections in a network is proportional to the square of the number of participants — becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” Paul Krugman 1998

Please play clip.

Sound advice from those who have taken the journey.

Many of you may think my commentary on corporate madness is harsh. I invite you to take a walk around your office tomorrow and observe it for yourself with fresh eyes. If you do not work in an office, you surely know someone who can give you a quick tour of his or her place of work. It is really important to do this if you are seriously thinking about starting your own venture or improving the cash flow situation in the one you already own.

Make note of the number of people who are surfing the Internet on a company-owned computer or making personal calls on a company phone. How often and how long do people hang out by the coffee station or water cooler to discuss last night’s football game? Find out how many internal meetings the average employee has to attend each month. What happens if they don’t attend? How many layers of management are there? Check out the book of Standard Operating procedures. How many are there? All of these things might seem necessary in a traditional business place, but they have no place in your start-up.

Try to assess how many people, including you, are working hard for internal versus external satisfaction. What I mean by this is that you will find many hard-working, dedicated people who have to spend a high percentage of time producing quality reports and presentations to placate their supervisor, when they could be working on increasing revenue by talking to customers. You will find bright, enthusiastic executives sitting around a table trying to impress their CEO with their debating skills, when they could be spending the same time meeting with vendors and customers. When was the last time your CEO actually spoke to a customer?

Check the size of the Human Resources department, and estimate the cost of what is essentially just a support mechanism for keeping employees comfortable. Make note of the empty boardrooms with their sumptuous high-backed chairs, all used only on special occasions. How many personal assistants are there to handle basic administrative tasks that the executive could do on the Internet for free in a fraction of the time? Where do the employees hang out for breaks and lunch? Who pays for the water coolers and coffee facilities? How much of the stationery and office supplies end up in employee homes?

How big is the accounting department? Have you ever studied a detailed breakdown of the company expenses? Where does all that cash go? What does the average full-time employee cost the company (salary, health benefits, incentives, overhead, equipment). How much does the office cost to lease each month?

Now, after your tour of the facility, take a break outside for some fresh airtime to contemplate alone. Imagine someone rich just left you this company in his will. The profit, if any, the company makes will flow directly into your bank account and will be your only means of income for the foreseeable future. If it makes no profit, then all the costs are to come out of your bank account starting right now. Every expense will be deducted from your personal checking account.

Return indoors, and imagine these are now your employees. This is your office space. You have to pay for them. What changes would you make right there and then with what you discovered earlier about the sheer wastage that exists all around you? How many of the staff do you think are indispensable now that you will have to pay real cash of your own to keep them? Do you really need a personal assistant anymore?

In the days when communication was done via lengthy letter writing, personal assistants were an essential part of the corporate structure. In these days of technological wizardry, you can do it all with a few mouse clicks or texts.

How essential are all those people in the finance department and human resources department? You can hire bookkeeping services for a fraction of the price.

How many offices are empty, but the lights and computers still on, and the heating cranked up high? How does it make you feel now that the company costs are coming out of your bank account?

That power bill will have to be paid out of your pocket. That printer cartridge that you saw someone else throw away, are you sure it is really empty? What will you now say to the employee who insists he prefers to read reports in hard copy instead of online?

Those people hanging out at the water cooler are costing you how much for their inactivity?

The Reality of Your Own Company

Now think about the company you want to start or the one you currently have that is already bloated with unnecessary expenses, rather than the one you just inherited. You cannot afford to carry anyone who is not totally committed to the cause. With what you know about your peers and the fraudulent expenses, the false sick days, the company cars used for personal travel, and their constant griping, would you trust any of them to work at your own company and NOT do those things?

You cannot waste cash on heating bills in a half empty office space or on the salary of a receptionist who spends half the day reading magazines or browsing Facebook and Twitter (I see that frequently). You can’t afford to have people who prefer to read a report in print format than online (I see that everywhere). You can’t pay to have people hang around gossiping about last night’s reality TV shows. All that is a drain on cash, pure and simple.

If it is true that so many small businesses fail within a few years due to cash flow issues, then from the first day you start your company, you are entering a battle for survival. Every cent counts and, if you truly believe you need to hire employees, it is important to surround yourself with people who live by the same philosophy and take accountability for cash flow. Regardless, you need to structure your company in a way that eliminates all those frivolous costs.

Cash flow and cash is not the same thing. Financial accounting is not focused on cash flow. It is focused on net income or profit. Over the long term, profit and cash flow are approximately the same, but the crucial difference is timing.

As we already discussed, timing for when cash leaves and enters is critical, especially as you get a company up and running. For example, when you make a sale to a credit customer, you recognize that sale immediately on your income statement. That’s called accrual accounting and your system might automatically order a replacement product ready for the next sale. At that moment you are doubly invested at double the cost. However, you don’t get the money for the first sale immediately. On your cash budget and your statement of cash flows, you don’t show that credit transaction until you actually receive payment, which could be a month away or more or in installments. How do you bridge the gap?

The gap between profit and cash flow in the early stages could be very large. If you have rapid growth in credit sales, for example, profit could far exceed actual cash received. This sort of situation makes smaller companies very vulnerable to running out of cash especially in the start-up phase when one has to pay for manufacturing and supplies in anticipation of demand. That is why you must be more like Ebenezer Scrooge and monitor every unnecessary expense. If it is not essential for your company survival, it has no place in you business.

Cash Flow Management is Quite Simple.

1. Borrow capital or establish a line of credit before you start-up even if you don’t think you need it… you will. Statistics don’t lie in business.
   
   
2. Do not hire anyone as a full-time employee until absolutely necessary and even then question if there is not a better way of getting the same thing done. If you still think it wise to hire an employee, email me. Let’s discuss alternatives. Your purchase price includes my help so what is the harm in exploring other ways?
   
   
3. Do all you can yourself for free. This means learning new things such as bookkeeping, computer fixes, mailing services, and travel arranging for which you probably had help in your regular job. At first it can be frustrating to have to pay attention to the administrative details, but very soon you will realize just how little skill is needed, and then you will catch yourself wondering what those employees in your prior company did all day long?
   
   
4. Keep travel and meetings down to a minimum. Why spend the cash and time to fly to meet when you can achieve almost as much for free over the Internet? Do you really need to have regular in-person investor and board meetings? Challenge your decision to call a meeting. Are you doing it because you think there is a genuine opportunity to achieve something or are you doing it because it is traditional?
   
   
5. Remain unpaid or on the minimum possible for as long as possible.
   
   
6. Do not lease office space or equipment unless your product or service relies on it. If you think office space is essential, please second-guess yourself. If you still think so, please ask other people what they think. If the answer is still yes, please contact me!
   
   
7. Offer customers incentives such as a 2-10 percent discount to receive early payment (less than 30 days) on invoices. This is preferential to having to wait ninety days or more for the cash to come in. It irritates me when I receive an invoice that includes percentage price penalties for late payment, so I will deliberately wait to pay it until the 30^th day. But if someone tells me I get a 2 percent discount for early payment, I tend to pay it immediately.
   
   
8. Negotiate longer-term payment contracts with suppliers. Some may allow a payment-free period. When I started my first company, I found suppliers quite willing to work with me on this. They prefer a company stays in business, and there is a mutual benefit to working out a deal.
   
   
9. Make it easy for customers to pay straightaway by accepting all manner of payments. Various online software exists to make payment online or bank-to-bank transfers a breeze. Invoices can be generated automatically. Whatever you can do to speed up revenue coming into your company, you must do it.
   
   
10. Invoice automatically at completion of transaction. A handyman and a plumber service my home. The handyman uses a simple online service that is linked to a well-known accounting program. I get the invoice immediately after the work is completed via email. I have to click a mouse five times to complete my payment. The plumber keeps a paper record using a book and a pen. Sometimes I get his invoices by snail mail three months after the job was completed, and long after I can recall what it was he did for me. I always wonder how many jobs and customers he forgets to collect payment from. I could have moved in the time between receiving the service and receiving the invoice.
    
    
11. If you borrow money, get the best short-term deal you can. You might be able to get an interest only or payment-free period that can really assist with cash flow. Also get a line of credit so that if you ever find your company facing a cash flow issue you can use the loan to buy you the time you need to bridge the gap.

Amazon

When you get this right, the benefits will be obvious. Glen Reishman was catalog manager for Amazon.com Inc. in 1996. Looking back on his time in the early days he noted:

“He invited me to join Amazon.com Inc., which I did. But what I remember most was, after lunch, walking into his office in the Columbia Building, and seeing a rack of blue colored shirts, his trademark at the time, and the door-as-desk. I laughed. I looked at the threadbare carpet and spartan furnishings, and said, “Investors must love this.” He gave me his patented laugh.

When I joined the company, I saw the door-desks being built all the time. They hired people to build them. Jeff told the Seattle Times: “These desks serve as a symbol of frugality and a way of thinking. It’s very important at Amazon.com Inc. to make sure that we’re spending money on things that matter to customers,” said Bezos, 34. “There is a culture of self-reliance. (With the low-tech desks) . . . we can save a lot of money.”

Cash flow management is not something you only have to get right once, but a constant vigil. Every recession catches out poorly managed companies, and the big names fall as regularly as the small businesses. Think of your business as a living entity and cash as the blood that flows through its circulation. If it stops flowing for any reason then the company, like any living thing, will die… and quickly.