25 Stories About Work – It’s All About Cash Flow (Part I, Small Companies)

I was recently on a plane doodling and thought of some funny / interesting stories from 25+ years of working and traveling. So I decided to write them up as short, random chapters of a non-book with the title of this post. Hope you enjoy them and / or find them interesting. Certainly the value will be at least equal to the marginal cost of the book (zero)…

The USA, early 1990s to mid 2010s

Recently I saw this little blurb in the NY Times business section which perfectly encapsulates one of the most important lessons I’ve learned in all my years of working – it is all about cash flow.

The simplest measure of success for a business is bringing in more cash than you pay out and having a positive bank account balance at the end of the month. When you are in charge of a business and attempting to make your payroll these sorts of concerns should always be “top of mind”.

Cash Flows in a Smaller Firm

When we started our consulting firm you had to put up enough capital to pay salaries for a while (we took a small “draw” to keep us afloat, not our former total compensation) until we were able to bring in cash from customers. However, this is a longer process than you might imagine if you weren’t educated in the realities of all the crucial steps in the chain necessary to get paid. Since we were accountants and finance people we went into this with “eyes wide open” but I can only imagine the types of trouble that creative types meet up with when facing this same conundrum.

Thus our sequence of cash flows at a high level when starting up a consulting firm looked like this:

– Additions – capital contributions from partners. Based on the equity you wanted in the final firm, you needed to put in capital (that maybe you’d never receive back) to start up the firm
– Additions – loans. We didn’t take out loans but we could have. Banks generally never loan you money unless you have collateral and we didn’t so it would have been credit card debt at the time
– Reductions – office space and rent. We needed to start somewhere. Initially we just used a room in our boss’s house, which worked out fine, and later we rented a space near a bowling alley. Note that everyone you are renting from eyes startups with a rueful glance and you can’t expect to get much in the way of credit because they don’t want to end up holding the bag
– Reductions – insurance, legal fees, taxes, office staff, computers. All the ephemera of an office needed to be purchased but we did it second hand. We also used our own skills rather than hiring third parties whenever possible (almost all of the time)
– Reductions – payments to core staff. We used “draws” which were minimal amounts to cover life expenses and in a way were payments in advance of what you’d earn, not like a salary that you receive regardless of the end state of the enterprise and your personal contribution. For office staff we picked up later we needed to pay them a normal salary

All of this happened before we even met a potential customer. Then we needed to fly out and meet customers (we already had a lot of connections; much of our early success came from bringing on existing clients from former consulting firms), convince them to sign us up, agree on a price and contract terms, and then begin doing the work.

After all this is done, then you need to actually “bill” the client. In many places this was delegated down, and the consultants didn’t take the process very seriously. I know of consultants in other firms that didn’t file their expense reports for months or years and didn’t put their time in a common system so that hours and days were lost. Since office staff rarely take things that seriously and are outranked by consultants (with advanced degrees), usually billing is a haphazard and incomplete affair.

However, in our initial firm, I did the billing myself, which meant that it occurred with military precision and zero defects. I knew all the consultants and when they were traveling and would empty their computer bags and take their receipts and bully them into telling me the hours that they worked. Then I would put it all in a spreadsheet and database and have someone cut out all of the receipts and tape them on paper and created a summary document that tied out to the penny. Then I would double check everything and the summary invoice with time and labor (80% of the costs) and the expenses (20% of the costs) would be hand delivered to the client within a few days of the end of the month (we captured data weekly so that I wouldn’t be trying to remember 4 weeks back at the end of each month). I am very experienced in accounts receivables / billing / payables and I knew exactly how to package everything and reconcile it against the purchase order that we had received from the client, and I would have all the materials so we could clearly bill the client each month.

Doing all of this allowed us to take probably 30-60 days out of the cash cycle as far as delays; our clients were large utilities and they didn’t care about cash flows; they would pay us “whenever” as long as it was within the terms of the contract (usually net 30). They DID care about minor expenses and odd billing discrepancies (always immaterial). Let me tell you a story about that…

One time we all went to dinner (about 10 of us) and it was a fiasco. The food was cold and not what we ordered and finally the restaurant comped us for 90% of it (we were served something else so we made out OK) and in the end I left them a $100 “tip” because the remaining bill was so small and we didn’t want to screw all the wait staff who served us for what turned out to be a 2-3 hour meal. However, I made the mistake of putting the meal with the “$100 tip” in the packet to the client. Even though this didn’t even represent 1% of the current months’ bill, for months to come the client was ribbing me about “being a big tipper” and this item just would not die. In hindsight of course the firm (us) should have just “eaten” the bill because this is exactly the type of irrelevant and inconsequential item that I should have known would have caught their eye.

Another time someone close to me was very creative when she was the CFO of a small startup; she convinced their largest client to pay in advance for a full year of service. To the client this was a great deal; they had money available in their current year budget (that they were going to lose) and since they didn’t care about the timing of cash flow (just expenses, assuming it was tracked correctly at all) they were glad to pay up front. To a small firm like that, eliminating the 120 days typically that drag between getting the current month’s revenue turned into cash was a godsend, and it enabled that firm to live on for another year and a half. In the end they went belly up (like most startups) but this sort of advance cash gave them time to at least attempt to grow and flourish rather than scrape by.

One time I was dealing with a large company that represented 75% of my small firm’s revenues. They were switching from manual checks to electronic payments. They sent a seven figure amount to our firm… as a physical check AND as an electronic payment. For a variety of reasons I was very familiar with their accounts payable group (we were installing a financial system for them) and I was quite confident that their team would NEVER figure it out. But we did the right thing and went to the CFO and gave him the physical check back and of course he was chagrined. Then, the next month, the same exact thing happened and AGAIN we gave him back the physical check. For all I know they were double paying many vendors but that’s a fact I cannot verify.

Recently I was working with a real estate professional who said that it NEVER makes sense to kick out a paying tenant. You ALWAYS want them to renew their lease, even if you end up forgoing the rate increase you COULD have charged the new tenant. By the time you have a unit idle for 30-60 days you’ve lost 2 months rent and if your new rent is 5-10% higher than your old rent (a great situation, BTW) then it will take years to make up that lost cash flow.

In all of these cases the critical nature of cash flow is apparent, but this isn’t something that is normally taught in college to the extent that is needed in the “real world”. The smaller elements of your accounts receivable (getting cash from customers) and accounts payable (paying to third parties) really can make or break your company and it requires laser focused attention.

If you remember anything about small business and entrepreneurship, it would be “Cash is King”.

Cross posted at LITGM

14 thoughts on “25 Stories About Work – It’s All About Cash Flow (Part I, Small Companies)”

  1. Recently I was working with a real estate professional who said that it NEVER makes sense to kick out a paying tenant.

    It depends on how fast they pay you. My father always said that there’s some business you really don’t need. When I had my small business I spent 90% of my bill calling time chasing down the same people. Which always grated me – we did the work – now I have to ask for the money that hasn’t been sent.

    Working for a client – before you have been paid – is the same think gas giving him a loan.

    As a friend of mine said in a similar business about clients who have you on the hook – you had better settle it one way of the the other before “your problem becomes my problem”.

    That vendor for Busch was smart – most small vendors simply see the business. You have to have incoming money to pay for the services you are providing that business.

    A/R is one of the main reasons for small business failure.

  2. I wish we had an edit function after I post it :-)

    Working for a client – before you have been paid – is the same thing as giving him a loan.

  3. Exactly right Bill. Procter and Gamble a couple years ago extended their payment terms to 75 days. Now it just gets longer and longer. Pretty soon each of these big companies will only have one or two big vendors who can afford to supply them.

    In P&Gs case, they claim it improved their own cash flow situation. Two years later, they’re flush with cash, but the CEO is stepping down after the company announced it is divesting over 100 brands. They haven’t come up with any new hit products in years. They decided to replace innovation with squeezing their suppliers.

    I wouldn’t be surprised if many smaller suppliers who have a lot of tribal knowledge but less cash try to become competitors with their former customer and develop their own brands in niches that the big guys either don’t care about or are just unable to cover.

  4. I do have one long-time client that I will work for on spec – as he has now and again extended to me the courtesy of paying me for work in advance. He does ranch real estate – the commission on one or two sales will set him up for the year. But then – we have known each other for years, and I occasionally have these momentary bouts of thinking that I can finally sort out his office files for once and all. He is one of these classic old-style Texans; shirt off his back for his friends, a handshake deal, and constantly dances along the thin line between solvency and in-. He will not, at his age, ever change, and he has friends upon friends besides me, who will indulge him, as we will always and eventually get paid.

    When it comes to the Tiny Publishing Bidness – no, contract signed and first check deposited before I lift a finger.

    Any of the Boyz or our readers want to buy South Texas ranch real estate? I know just the person …

  5. I’m still waiting for the info from an American firm that will allow me to invoice them: I’ve been waiting since January. Apparently there are difficulties in Nevada, or “issues” as they dishonestly call them.

  6. Some of the vendors who really got hurt were those auto supply companies for GM. As their financial picture got bleaker and bleaker, they were squeezed more and more.

    A lot of them are gone now. Toyota seems to have an enlightened approach to vendors – to the point they see them as partners. Instead of playing one off against the other they have long-term relationships and the vendor eventually sees things as Toyota sees them and offers their parts accordingly. Not just the cheapest bidder.

    Same situation supplying for Walmart.

    Sure you get huge business but if they are squeezing you down to the penny some vendors see the folly.

    Reminds me of the skit by Cheech & Chong and the El Monte Furniture Warehouse.

    “We lose money on every deal – so how can we do this? VOLUME!

    It’s not the gross – but the net….

  7. This all applies to medical practice, or did when doctors were small businessmen.

    My office staff always were on top of receivables but the government programs were by far the worst. Medicaid (MediCal in California ) would take two years to pay and then it was about 20% of what private insurance paid. They would also reject a bunch of claims saying they were submitted after the “due date.” We would complain but got nowhere. Then we tried to send bills registered mail with delivery receipt but they would not accept them. We didn’t bill MediCal at all except for large bills like trauma cases. Many GPs would see MediCal patients who were referred by friends or relatives but didn’t bill at all. They just wrote it off.

    Insurance companies would start to stretch out payments in the fall. We would have to do some extra work every year about October.

    One year, I joined another surgeon friend as a partner. His office was a mess. I put my girls to work on his receivables and they collected about $400,000 in delinquent bills. He grumbled about the work and I just compensated them myself by sending them to Hawaii with husbands or boyfriends. I had the highest paid staff in the community but also the smallest for the volume we did.

    Now, most doctors are employees and have former hospital administrators as group administrators. The rest are in cash practice which cuts overhead about 40%. I see comments in places like the Wall Street Journal about doctors charging too much and getting rich. Most are super ignorant.

    When I was practicing, we used to do things like pay for lunch if our office staff took another doctors’s staff to lunch. If that doctor wanted to refer a patient to a surgeon, his staff usually had been out to a free lunch with mine and many had gotten their jobs through our office as our office manager ran an informal employment agency. They knew who to call.

    I’ve told some of those things to older surgeons who were astonished. They hadn’t thought of those things. Now, of course, it doesn’t matter as referrals got to panels and nobody cares anymore. I’m told that many groups will no longer accept Medicare. Mayo Clinic, Phoenix is one.

  8. Sgt Mom,

    How south is South? If you were talking Hill Country, that would be different! My wife had relatives who lived in Kerrville, what a totally lovely place.

  9. Hi, Kirk – my sometime ranch real estate employer does basically anything south of Austin, including the Hill Country, all the way down to the Valley.

  10. An example of how regulations can affect cash flow: Years ago, I saw an article that mentioned a study of what happened in southern California after the establishment of a growth management plan.

    Typically, after the plan was established, it took five years from the first application for a permit to a house being finished. Large construction firms coped with that in the obvious way: They “banked” permits each year, so they always had some in their pipeline. That added to costs, but since other large firms were affected in the same way, it didn’t hurt them much.

    And the large firms benefited because their small competitors were wiped out — and those small competitors had provided most of the price competition.

    (My apologies for the vague reference, but that’s the best I can do, from ememory.)

  11. I long ago noted that, the rule for any startup — even a spinoff from an established business (which may be able to nominally suck at the main business’ teat for longer) — the primary rule was, to put it a bit crudely:

    “Spend cash flow like it was found money, but spend reserve capital like it was inches off your penis.”

  12. We have a number of vendors that pull the 90 to 120 day terms and we tell them we are happy to give them those terms if they really want them. However, assuming they are well capitalized, we do the math and add 20% interest for those extra days to the price. Nothing like buying an unsecured GE bond with a 20% ROI. Plus, after that they tend to get treated like a competitor not a partner.

    Lots of executives seem like they have never had anything to do with purchasing or AP. Simple trick from CFO class is a great way to piss of those you depend on.

  13. arl, I think it would be great if you collected these stories in a Kindle ebook, perhaps with a summary chapter or two on principles that you have learned. Depending on the size of the file, you could easily charge $5 or $6 for the ebook. I read a lot of science fiction on ebooks, and up to $3.99 they are impulse buys if the reviews are on balance positive. it would be a good way for readers to keep them in one place.

  14. yep, way back when a friend’s father had a machine-tool business. My friend and I were helping deliver a 60K+ lathe to a local GE plant. The father took the bill up to the accounts payable office with a standard 10%/net 30 term on it and was told that GE paid on a quarterly basis. Father came back downstairs and told the fork-lift driver to put the machine back on the truck.

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