The subject of cash flow is near and dear to the hearts of most business owners. In terms of importance, it usually ranks right up there with sales growth, profitability, and finding good workers.
Although it can be a leading cause of sleepless nights on the part of business owners, there’s frequently still a disconnect when accounting professionals attempt to explain cash flow. Too often, these conversations involve terms like turn on receivables, number of days cash, or my personal favorites, opening balances and closing balances. In cases like these, the accountant might as well be speaking Martian. To the business owner, they’re just more meaningless numbers on a page.
At a recent conference, I heard a business owner describe cash flow in terms that just about any owner can relate to. Prior to his restoration company, this owner had a successful career as an executive with a large, international company. He could cite the clinical definition of cash flow, as well as many other multisyllable financial terms. But it was his description of cash flow in his own small business that caught my attention:
“Cash flow is standing at the mailbox, waiting to see if the mailman brings any checks, dancing like a kid who has to use the bathroom.”
Now this is a business owner who has a visceral understanding of cash flow! Especially when it’s been flowing out faster than flowing in. This is an owner who understands the gut-wrenching decisions and unpleasant conversations that must be made if those anticipated checks don’t arrive.
Anxiously waiting for checks in the mail is just one activity in a long procession of activities and decisions that ultimately lead to the mailbox dance. It’s a tangible demonstration of how money follows, not leads. Money doesn’t lead. It follows the actions we take that follow the decisions we make that follow our thinking.
Unless we have a fondness for dancing at the mailbox, we need to evaluate the up-line decisions we make regarding cash flow. These decisions, some big and some small, occur in every area of our business.
With customers, it’s recognizing that all customers aren’t good customers. Some clients are just wrong for our business. We’d do ourselves a huge favor if we’d occasionally let one of our competitors serve some of these unworthy and slow-paying customers.
Some decisions involve how we compensate our workers. Backing ourselves into a corner with a too-generous compensation plan early on to attract or keep a worker may not work out long term and could ultimately place serious strains on our cash flow.
Sometimes cash flow is so good, we get reckless with the cash. It’s easy to fall prey to the thirsty-man-in-the-desert syndrome where we use the cash to reward ourselves for the aggravation, risk, or stress of running our business. Then, when a slow time comes, we have little cushion to fall back on.
None of these are easy decisions for an owner whose focus is on hitting a sales goal or just trying to keep his workers busy during a slow period. But they’re all decisions that will ultimately end up with the owner either driving to the bank with checks in hand or dancing once again at his mailbox.
Chuck Violand is the founder and principal of Violand Management Associates (VMA), a highly-respected consulting company in the restoration and cleaning industries. Through VMA, he works with business owners and companies to develop their people and their profits. Violand is the past president of the RIA. To reach him, visit violand.com or call 800-360-3513.