Cash Flow

To increase cash flow, a company often attacks the problem from two sides: (1) decrease their Accounts Receivables time, and (2) increase their Accounts Payable time. In other words, try to get money faster, and try to pay money slower.

In the late 1990’s and early 2000’s, I was consulting at Verizon (previously known as “Bell Atlantic”) just outside of Washington (DC). Parcplace Systems (PPS) was also providing consulting services to Verizon, and the manager of the consulting services division of PPS was a man named “Mike Ruhland”. PPS needed a better cash flow, and Mike, as one of the managers, tried to oblige. So Mike made two changes to PPS payment policies.

The first change Mike made was to increase the time to pay his consultants by an extra 30 days. This had the obvious effect of giving PPS an extra 30 days of free use of money that would have otherwise been paid to the consultants.

The second change is one that we have also recently made at Bountiful Baby (BB). It is to pay for “actual expense” for meal expenses instead of a daily per-diem meal allowance. The reason we made that change at BB is because of some arcane IRS rules that disallow per-diem in certain circumstances, and at BB we just wanted one uniform policy that always works for everyone all the time. Hence we pay “actual” instead of “per-diem” for everybody. Mike *might* have made his change for the same reason, but everyone (including me) believed the real reason for his change was to save PPS money.

The result? Morale at PPS went into the toilet. Productivity took a massive hit.

Mike came to me and asked me why I thought morale was so bad with his consultants. Counting off with my fingers, I told him, “Mike, there are two things you never want to mess with. (1) don’t mess with their money, and (2) don’t mess with their food. You are messing with both. At the same time”.

If you survey the past you will discover that a significant amount of tension and drama that has occurred in the reborn industry has arisen because of someone taking another person’s money and not giving them back the “value” they thought they were purchasing for that money within the time that was expected.

You are messing with another person’s money when you do that, and that is *extremely* risky. Don’t do it.

This is one of the reasons BB does not do “pre-orders”. Also, when a customer places an order at BB, we want that order fulfilled as rapidly as possible, and then marked as “Fulfilled” and archived.

We have no desire to take customer money unless we can immediately ship. You should strive to do the same.
For your business, revenue is a vanity metric.  Cash is oxygen.
Have you noticed that your business profit never equals your cash? Profit is a deceiving metric. So is revenue. It is common for ecommerce companies to run out of cash, even though they are profitable. This is because the cash is often locked up in inventory. Take this hypothetical company, for example:

$235,000 Gross Profit for the year
$200,000 Inventory Increase for the year
$50,000 Accounts Payable increase for the year (to buy all that inventory)
($15,000) Negative Net Cash Flow, which was probably financed via a credit card

This company has a cash flow problem, even though the business is profitable.
Many companies have an “Accounts Receivable” that can even make matters worse. Like in this hypothetical example of a “growing” company:

$400,000 Gross Profit for the year
$200,000 Inventory Increase for the year (because the company is growing)
$225,000 Accounts Receivable (this company sells on credit, which fueled it’s “growth”)
$75,000 Accounts Payable increase for the year (to buy all that inventory)
($100,000) Negative Net Cash Flow

This company is in *serious* trouble, even though the gross profit is really good.

Your cash is locked up in your balance sheet, and it is *cash* that is needed for the company to survive. Cash is oxygen. And it is only indirectly related to profit.

There was a time when Bountiful Baby allowed a small number of customers to buy via “credit” on account. Thus we carried an Accounts Receivable. To manage cash flow, we discontinued that practice long ago.

Similarly, we do not carry an “Accounts Payable”. We always pay everything immediately. One thing we have found with this policy is it keeps us on better terms with our vendors, which sometimes makes them more willing to help us if we need a special favor. It also reduces our overhead, which lowers our costs.

Look at your numbers regularly— at least weekly. At Bountiful Baby, I developed the habit long ago to do this every morning as my first task of the day. I reconcile our bank account and our business credit cards every morning, and analyze the cash flow at the same time.

The things we put on sale are controlled by three things: (1) the cash flow that we need at that time, (2) the need to keep the employees busy, and finally (3) as a mechanism to move old inventory. Of those three, the third one has been the least important for us. It is the one that barely effects what we put on sale. The other two have been king. But I am hoping to reverse that, so that the sales mainly only happen for #3.

You need accounting software, otherwise you are flying blind. And, revenue is a vanity metric, while cash is oxygen.

Nevin Pratt