We have all read countless articles about how we learn from failure and it makes us stronger, and therefore the more we fail, the greater we will succeed. But the converse may also be true. If you don't keep your eye on the right kind of success, you are likely to fail. And sadly, it will catch you by surprise, as you really thought you were doing great.
What is the "right kind of success"?
Many of you will recognize this image as Marcus Lemonis from the television show "The Profit". The program portrays his activities in investing in struggling businesses and then fixing them to put them on the path to success. Although the show is titled "The Profit", are profits really the right thing to focus on?
In the photo, Mr. Lemonis is sitting on a throne made of cash (by the way, most financial advisors will tell you that sitting on cash is not recommended). But the message behind this royal image may be very subtle. Most of us have probably heard the phrase "Cash is King", perhaps more times than we would have liked. But there is no denying the important message that is so tightly packed in those three little words. But still, to the dismay and bewilderment of us "financial types", we watch as companies devote little attention to serving the king.
Many might say it is the job of the
I thought it would be interesting to look at ways of appreciating (in both senses of the word) cash, using the structure of the 3 P's, a concept whose origin is attributed by many to Marcus Lemonis. Perhaps after reading this, they will think about a new title for the TV show.
People
Everything starts with the people. When it comes to focusing your business on cash, it is more important than ever to put the right people in the right roles.
Once you've identified the right people, only then should you invest in training. Be sure that your training program highlights the monetary aspect in every function, as every function has it. These topics will vary depending on type of business (service, manufacturing, etc.), but the key is to drive home the notion of how the fiscal outcome is determined from the very beginning of the process, and is either enhanced or diminished with every other decision along the way. It is also important to get people thinking in terms of the overall enterprise, and not within individual silos.
How do you know if you've been successful? Besides your increasing cash flow (if that weren't enough), you would want to develop metrics for evaluating employees' performance. Many metrics are already in place in your standard performance appraisal systems, but you might now want to incorporate some of the cash-focused metrics. You would want metrics that can be measured at the individual level, as well as some at the enterprise level to reinforce the no-silo culture.
Processes
It goes without saying that whenever cash is involved, internal controls are key. There are entire books on controls, so I won't delve into the nuts and bolts here. Instead, I will only mention that the effectiveness of most controls is determined by the organizational culture. So, in addition to structural things like segregation of duties, which is often difficult in smaller companies, the attitude and mindset, and particularly the "tone from the top", play a vital role in the company's overall control environment.
Also on the topic of controls, as with anything else, it is important to measure. The effectiveness of controls is typically measured by auditing. Many think of auditing as a process to detect flaws in controls, but I find it more useful to think of auditing as a control itself. Again, many smaller companies find it difficult to assign the resources to carry out an audit, or many do not feel the need, as "we're all family here". But an audit does not need to be big and fancy, as long as an effective, impartial review of some kind is performed. Remove the personal aspect from it, and start out with a simple one-page "audit plan" that spells out the objective of the review and the steps that are to be taken. Somehow, when you have a checklist in hand, it's harder to hurt somebody's feelings.
Finally, one of the key attributes of any process is its timing. In talking about cash flow, the phrase "time is money" couldn't be more true. When you think about it in simple terms (which is what I do best), you possess significant influence over the two key drivers in cash flow: collections and disbursements. With disbursements, it is up to you as the leader of the company to work with your suppliers to determine the best payment terms for both of you. Fortunately, with existing suppliers, you have a baseline of pricing and terms based on your history. You would want to see how far you can extend those terms without affecting price. Conversely, if the supplier is willing to offer discounts for early payment (e.g. 2/10 net 30), it is often advantageous to take those discounts. And with the ultra-low interest rates of today, it sometimes even makes sense to borrow funds through a line of credit in order to take the discounts.
But how do you influence collections? Simply put, your customer can not promptly pay an invoice that he does not promptly receive. You might be surprised, but many companies do great at everything else, but then for whatever reason, drop the ball when it comes to getting the invoice out the door. But there are two aspects even here. It is one thing to issue an invoice promptly, and another thing to issue a correct invoice promptly. Organize your billing function to issue invoices as soon as contractually allowed, but with a heightened emphasis on quality so you don't give your customer an excuse to drag his feet.
Product
Your company is producing widgets at a cost of $1 each and selling them at $3 each. Your income statement has reported positive net income every year for the past ten years. Yet, you are now filing for bankruptcy. There are so many seemingly successful businesses that have failed. Why? Because they were using profits as their measuring stick, but profit is not synonymous with cash. You sell your product and report the revenue, yet you never collect payment. You constantly outlay cash for capital improvements and spread the depreciation expense over twenty years. Your debt matures in a tight credit market and you can't refinance. There are many scenarios that your income statement and profitability alone won't tell you.
When it comes to your product (or service), your net cash is determined by what it costs, how much you can sell it for, and, as mentioned previously, when you pay and when you collect. When you collect is not only a function of your billing practices (which you control), but also the quality of your customers. In a retail environment, you can't really control the quality of your customers, but then again retail is typically a POS, so it doesn't matter. In other businesses, you would want a good procedure for conducting credit checks for new customers, as well as monitoring performance for existing customers. You may be tempted to offer prompt pay discounts, but keep in mind that if taking such a discount is good for you, then giving such a discount might not be. Instead, consider less attractive pricing for slow payers. If you happen to lose a bad customer along the way, you might be doing yourself a favor. There are simply some customers you can't afford to do business with.
On the payment side, in addition to striking the right balance between price and terms as discussed earlier, consider alliances with strategic suppliers. Again, perhaps a bit more difficult for the smaller company, as the key is to identify suppliers for whom you represent a significant amount of business. Your success is therefore vital to their success. I have seen some successful cases where the key supplier was allowed to set up shop on the company's premises, with on-site inventory and personnel dedicated to exclusively serving the company. In such cases though, one needs to keep a close eye on the controls around the transactions between the two parties.
Period (the 4th P?)
The success of your business is measured by the increase in its overall net worth, which is indicated by the aggregation of cash flows over all periods; so don't be misled by the periodic non-cash results on your income statement. Once you and your team start thinking a little less about profit and a lot more about cash flow, the tables will turn and you will become the new king, the King of Cash.