Run Silent, Run Deep, Run Out of Money

I’m posting this today with a double purpose, I admit, because in about two hours I’m going to be giving a workshop at the annual Small Business Development Center convention in Denver, on the topic of “Teaching Cash Flow.”

The win here, I think and hope, is to distinguish between planning cash flow and teaching cash flow. Those are separate problems.

The most important problem is getting people who haven’t been running companies to believe that cash flow and profits are different. That’s so vitally important because, on the surface, it doesn’t add up. It isn’t believable.

I developed business plan software originally as templates for business planning clients to deal with the following amazingly typical exchange:

Me: So if you grow faster, then you’ll need to get more financing.
They: No, that can’t be true, because we’re profitable. We make money with each sale, so the more we sell, the more we can fund ourselves.
Me: Bingo! Please sit down here for a few minutes and deal with these numbers.

And so it would go. As soon as you’re managing inventory or selling on credit — which means just about any sale you make to a business — then your cash flow is waiting on the wings, a silent killer, to foul you up.

I learned this first in business school and then forgot about it. I learned it later again, the hard way, when Palo Alto Software sales tripled in 1995 and that nearly killed the company. Why? How? Well, the huge sales increase was selling software product through traditional channels of distribution, meaning stores, and that means selling to distributors who then resell to stores, and that means that it can take five months between selling the product and being paid for the product. In the meantime, you’ve got to make payroll and pay your vendors.

Yes, it’s a good problem to have, we all want to increase our sales and profits, but it’s a whole lot easier to deal with if you plan the cash implications well.

Today in my presentation I’m going to use one of my favorite metaphors, the Willamette River as it runs through Eugene , Oregon, where I live. The river slows down coming out of the Cascade Mountains and into Eugene, and it looks deep, slow, and peaceful; but it’s much more dangerous there than when it’s throwing up white water through the rapids. Why? Because it seems so calm and welcoming. People disrespect its currents, get caught in weeds, branches, or rocks, and … well that’s a good metaphor for the way cash flow hits small business when things are good, when sales are growing.

What’s particularly painful about the cash flow problems that come with growth is that, precisely because there is growth, these problems can be prevented by planning.

You can see how the sales are growing, then determine what your cost of sales will be, and look at what you have to pay, to who, and when. See how your checking account will balance go down, and down. Next, chart out when your customers will pay you. It will be obvious if you will run out of money before those profits actually reach your hands. You can then plan how to find the financing to float your boat before you actually hit the snag and sink.

We’ve had growth spurts since then that were far less painful because we understood the dangers of cash flow, planned for the cash implications of growth, and worked with our bank ahead of time to make sure the working capital was there.

–Tim