25 Stories About Work – It’s All About Cash Flow (Part II, Large 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

When we have new staff I usually orientate them on the concept that

You should assume that many outside vendors who bill us don’t care about getting paid

Although this concept seems astonishing and against basic capitalist principles, it is often the case.  While each vendor is different, a share of the vendors bill us months and months after the fact and often the bills are incorrect and  incomplete.  Sometimes we have to initiate the process and call the companies to demand the invoices, so that we can match them to the purchase documents and receipts, as well as check the taxes, quantities and costing components.  If we don’t reach out to these laggard vendors and push for complete and accurate billing, we will have a crisis on our hands quarterly when we attempt to accrue for what we are owed and sort through months and months of late and incomplete bills and partial payments.

The only time some of the vendors start to care about collections is when the bills are so delayed that the sales teams’ commissions are at risk.  At that point the company typically springs into action and is “Johnny on the spot” attempting to reach out to resolve any issues because the sales teams at the vendor have significant power in the organization and complain with vehemence whenever their compensation is at risk.

While some vendors are laggards on collections, they all are focused on closing deals at the end of each quarter so that they can “book” these deals as revenue per accounting purposes.  There are criteria that must be met (the hardware must be shipped from their dock) but the firms will generally stay up all night or jump through whatever bureaucratic hoops are necessary to complete the deals for that quarter.

These notes specifically apply to public companies that aren’t in major financial distress.  These companies are aligned to GAAP principles, which focus on earnings and not cash collections, so they often don’t stress timely and accurate invoicing and collection of their bills.

On the other hand – private companies or those that have been taken over by hedge funds and other sorts of shrewder operators, are completely focused on cash flow.  If you are a private company, earnings matter (especially if you are “prettying” it up for sale) but CASH IS KING.  Private equity investors like to pay themselves cash dividends out of the companies they acquire, so they definitely sweat the timing of payments and keep a close handle on cash flow.  These same private companies also work strenuously to minimize taxes which stand in the way of dividend payments to the owner.

Public companies often do not value the nuts and bolts items of process and benefits they would receive if they focused on timely and accurate collection of their bills.  If you go to obtain an MBA there isn’t a class called “corporate basics” but there should be; for every lofty case study of high level strategy there should be something that causes you to work through how to optimize everyday activities so that the organization runs smoothly and efficiently.

Much of this is caused by our accounting standards, which do require statements of cash flow but often go through convoluted practices to determine earnings that varies significantly from the basics of cash entering and leaving the enterprise.  The entire process of “capitalizing” investments, which is core to accounting principles, means that the enterprise uses internal results that differ significantly from the underlying cash flows of the business.

This isn’t meant to “judge” the processes or standards, but it is important to realize how behavior will differ significantly for small businesses (which can go bankrupt from “floating” customer bills while their obligations require immediate payments) and private businesses (which often manage on a cash flow basis to maximize cash dividends) and public companies which value earnings which is more often linked to items other than cash flows.  You often won’t understand the root cause of these often startling differences of approaches unless you can see the bigger picture.

Cross posted at LITGM