King Cash

Lots of small businesses fail but not for lack of successful services and products.  Those may be stellar, but it’s the ebb and flow of cash that sinks or floats your practice.  Over 60% of business failures occur because cash flow slows to a trickle, crashes against the rocks, hits the rapids, whirlpools, floods the delta, disappears  down a sink hole, freezes over …  I think I’ve worked that metaphor to death but you get the point.  Cash is King and don’t let anyone convince you otherwise. 

Cash Flow, like climate change,  is not a sexy topic.  Constantly collecting and analyzing unvarnished data is bad enough, but forecasting without the aid of rose colored glasses asks too much.  Who wants to do that? Not me, not most, which is how it comes about that so many businesses fail.   Lest you think this only happens to others, it happens to Audiology practices as well.  Without even thinking hard, I can conjure up at least five practices that failed due to cash flow problems.  All had good locations, competent staff, and receptive markets.  I’m sure you can think of others. 

Daniel’s Dog Poop Theory of Cash Flow Management

Sexy or not, Cash Flow weighs on me, in good part because of the economic recession from which we are just beginning to emerge.  Economic downturns are a classic Threat in SWOT analyses{{1}}[[1]]Strengths, Weaknesses, Opportunities and Threats.[[1]], where Threats are those things external to one’s business that can do harm.  Briefly, recessions convert people from spenders to savers, which reduces sales revenues,  forcing business owners to get creative about cost cutting or suffer Cash Flow restrictions that may force economic shutdown.

So much for Threats.  It’s internal Weaknesses that are the source of most Cash Flow problems. Weaknesses manifest differently in different businesses, as my son Daniel’s Dog Poop Theory attests.  He hired a company to do weekly dog poop pick up.  They did a terrible job of picking up poop, but an excellent job of billing him.  He fired them and hired a guy who did an excellent job of poop pick-up but never remembered to send out bills.  Daniel theorized that combining the two companies just might produce a winner and that’s what happened.  The excellent poop picker couldn’t make his bills and went out of business.  Cash Flow strikes again.  Not to worry, the first company hired him, billed for his services, and cash flowed like a fire hose.  No more Weaknesses, no more Cash Flow problems. 

The dog poop story sounds silly, but it’s truer than you think.  In the past two weeks, two excellent, independent service people that I rely on for my hair and plumbing needs filed for bankruptcy protection.  Cash Flow, in two different form, struck twice.  I’m sure you can think of similar cases in your vicinity.

Anna Karenina’s Principal of Cash Flow

Happy families are all alike; every unhappy family is unhappy in its own way.{{2}}[[2]]First line of Leo Tolstoy’s novel, Anna Karenina.[[2]]

This principal–spelled out by Tolstoy to depict the downfall of a woman who seemingly had everything– illustrates the idea that failure results from any one of a variety of weaknesses, no matter how talented or strong the person (or company).  In contrast, success accrues from a lack of weaknesses, not salient strengths.  This is bad news for prima donnas and makes for boring copy: fatal flaws are  sexy, mediocrity is boring.   To rephrase and state the obvious:

Successful businesses are all alike; every unsuccessful business fails in its own way.

It’s human nature to think of our practices in terms of past successes and present bank balances.  Past failures are glossed over as one-time aberrations; money in the bank predicts more to come.  The sexy, erroneous view of successful business as a series of Kodak moments protects you from the boredom and inherent uncertainty that comes with cash flow analyses.  But Kodak moment can’t protect you from real life and the fatal flaws that can throw your business under the train.

Cash Flow Defined

The good news is that Cash Flow is easy to define and measure, if not easy to control.  Here are the definition and formula of “free” cash flow, courtesy of bizfinance:

Free cash flow:  cash flow available to all the company’s investors, including shareholders and bondholders, after the company has made all investments necessary to sustain its ongoing operations. 

Free Cash Flow = Sales Revenues- Operating Costs and Taxes{{3}}[[3]]Get numbers for Sales Revenues, Operating Costs and Taxes from your company’s Income statement (also called the P&L).[[3]] – Required Investments in Operating Capital{{4}}[[4]]Get this from increases in assets on your Balance Sheet.[[4]]

 It’s not sexy, but it’s also not rocket science. When costs exceed revenues, you’ve got a Cash Flow problem.  Maybe not today, but definitely tomorrow.  

Which brings us back to those successful practices that we tend to take for granted because they’re all alike.  Perhaps that’s the essence of mediocrity, but nevertheless, those businesses are doing something right and they’re doing it right all the time.  They’re tending to growth, they’re managing assets, they’re avoiding or paying off debt, they’re controlling costs.   In short, they’re acting like boring, responsible adults doing tedious but necessary chores we’d rather skip and think about tomorrow.  Those businesses are not the Anna Kareninas or Scarlett O’Haras of the world, but they’re also not throwing themselves under trains, digging in the dirt, or picking up dog poop for free.  

The one good thing about Cash Flow problems is that they are equal opportunity offenders. Unlike the current series of gender differences, Cash Flow affects everyone regardless of gender.  Next week’s post will explore different types of Cash Flow problems and then we’ll get back to gender wars and other sexy topics.

photo courtesy of Fletcher & Assocs.