Keep Digging. The Problem With Your Cash Flow Isn’t What You Think It Is
When you are looking to fix your cash management issues, don’t just look at the symptom. If you don’t dig past the symptoms you are seeing at the surface of a problem, you probably don’t know what your real problem is.
Most of the time when I am asked to come in and resolve issues, I am asked to fix the symptoms of a business’s troubles.
- “I need good job descriptions, so the business runs smoother.”
- “Help me get a loan so I have more capital.”
- “I have a lot of profits. Help me find more cash.”
- “Would you be my part-time CFO, so I can get my finances organized and we can grow again?”
People don’t realize that the symptoms they see and keep them awake at night, are not the real issues that need to be fixed. They try to get rid of the immediate pain and often try short-cuts that do more harm than good.
When I was Leaking Water instead of Cash
Let me tell you a quick story that will give you a better idea of what I am talking about.
My wife, Lisa, called me one day and said, “David, there is a leak in the basement. I just noticed it when I was running the dishwasher. Can you look at it and see if you can figure out how to keep the water from getting all over the floor?”
When I came home that night I changed into my work-around-the-house clothes, turned on the dishwasher, went downstairs, and saw the leak. I told Lisa, “The answer is simple. Stop running the dishwasher.”
Let’s pretend that she agreed because she prefers to do the dishes by hand and use more time and water, than have a leak on the floor. Less convenient, more resources used, but the problem goes away.
Except the problem didn’t go away.
It turned out that if you ran the kitchen sink for a while, the leak in the basement came back. Time to call Larry the Plumber, the guy who really knows what he’s doing.
Larry comes over and turns on the water in the sink to see the leak for himself. “Yes,” he confirms, “You have a leak coming from the kitchen. We’ll have to open up the wall to find the source of the leak, and then figure out how to fix it.”
We went downstairs, where I showed him the leak and the damage. He asked questions, poked around, then said, “Let’s see if we can’t make the leak start again.” Once we did, he made an educated “guess” based on his years of experience, opened the wall near the ceiling, and within 15 minutes had identified the problem.
The leak was inside the basement wall. It took about 30 minutes to cut out 12 inches of broken pipe and put in a new pipe. We were fortunate. It was a quick fix with only minor damage to the wall.
Cleaning up the damage from the leak was much harder and more expensive than fixing the leak itself.
“I don’t have enough cash and here’s what needs to be fixed.”
At least half of the time during my first meeting with a client, I am told “Here’s my problem and I just want you to come in and fix it.” Most of the time they believe they know the problem but have only identified a symptom and cannot even begin to see the root problems.
When I worked with the plumber, I was able to show him the water leaking on the floor. I described what was happening and when; I showed him the hardware I knew was involved. Then I depended on him to find the cause and give the best solution.
Larry (my plumber) used a pattern that other professionals, such as doctors, attorneys, and good consultants, use. He:
- Listened to the problem
- Asked probing questions
- Tested and observed
- Suggested a course of action
- Implemented the fix
Get Below the Surface with Cash Management Issues
The reason that Larry the Plumber was able to diagnose and fix my problem so quickly was his years of experience. He’d seen the problem before. He knew that the cause could have been one of 3 or 4 different issues. He had the right tools and supplies to quickly and easily open the wall, make the repair, and not make a mess. It was an impressive experience to see a true professional at work.
The challenge most business owners have is they are not cash management experts, haven’t seen the problem before, and don’t know how to fix it. They do know their products, how to deliver them, how to price and sell them, and how to make their customers happy.
How do you start to dig below the surface and start seeing the cause of the problem in your own business without becoming an expert? Here are some ideas to get started:
1. Look for the causes of the problem, not just the symptoms
Ask “Why is this happening?” If you can answer this question, you may have found the root of the problem. Or maybe you figure out why something is happening, but don’t understand the next issue. A self-help expert told me once that it takes asking “why” up to seven times to get to the root of a person’s motivation. Don’t be afraid to ask why again… and again…and again, until you finally say, “That’s why we are having this problem!”
2. Assets are not profits
Remember: The cash you have in inventory, and other assets that have a higher value if you sell them, are not worth that much until they are actually sold!
Let’s take an example:
- I buy some gold for $200.
- The price of gold doubles in a year so my coin is now worth $400. What is my profit?
- If you said $0, you are correct. I haven’t sold the coin so there is no profit. Profits from assets is only the additional cash in your pocket once you sell the asset.
The same goes for any other business assets. Don’t hold on to inventory or insist on full-price for underused services. Sell the inventory or unused capacity for less than you originally wanted, get your cash back and buy new inventory. Make a little profit now or reduce your losses.
Turnover relates to the concept of selling your inventory and reinvesting quickly. Imagine these two scenarios:
A; You can sell 5 gizmos a week for $100 and make a total of $220 profit.
B: You can sell 15 gizmos a week for $75 each and make a total of $300 profit.
Which gives your more cash in your pocket? Not a trick question. The answer is B. You are selling more, faster. That’s called turnover, or velocity. Can you increase your velocity and make more cash?
The concept of velocity is captured in the Cash Velocity Calculator, a tool to help you understand and better manage the cash invested in your working capital; accounts receivable, inventory and accounts payable.
4. Impact on the business
Some cash management problems have large impacts on the business and some have a small impact. If you are having serious cash management issues you won’t fix it by only changing something small like cutting back on office supplies or cancelling your subscription to National Geographic. Working on the little ones might make you feel good but won’t fix your problem.
Try to identify the big impact items. Big impact items include: Past due receivables, excess capacity and inventory, high customer acquisition cost, and a long time from sale-to-cash or cash-out to cash-in.
5. Relationship driven transactions
Many of your cash management problems will be fixed at least in part based on the relationships that you have.
Customers may need to pay faster, put down a deposit, work with you to simplify their ordering or shipping process, etc. Your best customers will want you to succeed and will offer their assistance, especially if you can show it is in their best interest to work with you.
Vendors will be happy to work with you. Your current ones should be happy to help you fix your challenges. It will make their business better in the long-run and they keep you as a happy customer. If your current vendor won’t work with you, a new one will! No matter what a vendor is supplying, unless they are providing an exclusive or patented product, there will be a dozen other vendors ready to step in and help you solve your problems.
Cash management is an everyday exercise, so put systems into place that make sure cash management is happening. The best systems are automatic with no time or effort in maintaining them once they’ve been implemented. An example is automatic bill pay, or even better, clients automatically paying you each month.
Other processes need to be done manually so you will want systems to make sure that they happen when and how you want. An example is reconciling your checking account to know how much money you have and projecting the amount of money you will have. Decide how often to do this – daily, weekly, monthly. Create a checklist of what the reconciliation entails and then a follow-up to make sure it gets done.
There are many tools that can help you find and fix cash management problems.
Your bookkeeping or account software is a key tool. It needs to be setup properly to provide reports that will tell you where the business’ strengths and weaknesses are. Add-ons to your bookkeeping software can help you focus on profitability, billing, and getting paid, and other details of your business.
A dedicated cash management tool will have the biggest impact on your ability to understand when you are getting paid and deciding when to pay your bills.
The key is deciding the right tool for the right job, so figure out what your challenges are first, and then go find the right tool to fix your problem. A good place to start is developing a cash forecasting model. Why Every Business Should Build Weekly Cash Flow Forecasts explains how and includes a template you to get you cash forecast up and running quickly.
8. Continuous improvement
Don’t try to do everything at once. Instead decide on a limited number of things to work on. Finish one and add a new one to the list. You can work on one big issue while completing multiple issues.
I’ve never seen a company that fixes itself in a one massive step. That usually results in a bigger mess than when they started.
The Problem Was Fixed, Now for the Real Damage
Back to my plumbing problem.
After the plumber was there, we started looking at the additional damage that was done by the water leak. It was a lot more than we had originally seen. When we looked a little deeper, we found:
- Dry wall that was soaked and had dried, and was now brittle
- Base boards that were rotten
- Mold on the floor and on a cabinet
It ends up that fixing the problem was easy, but the damage was going to be a lot harder and more expensive to fix. Still, our small problem could have been a lot worse. The plumber said that the pipe would have eventually burst if we hadn’t fixed the small leak.
So, fix your problems now before that get any worse! Remember, if you are having problem finding your cash leaks, or if you have a cash flood leaving your business, don’t be afraid to call a “plumber” to find and stop the problem.
How Deep Do You Have to Dig?
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