Episode 1: Why $1 Million Doesn’t Matter

Mark: Welcome to Unsuitable on Rea Radio, unique financial services and business advisory show that challenges your old school business practices and the traditional business suit culture. You'll hear from industry professionals who think beyond the suit and tie to offer meaningful, modern solutions to help you enhance your company's growth.
I'm your host Mark Van Benschoten. For episode one, Why $1 Million Doesn't Matter, I'm joined by Dave Cain, our go-to cash flow guy. Dave knows cash flow inside and out. Today we're going to show you why your cash flow is more important to your success than your bottom line. Welcome Dave.
Dave: Hello Mark.
Mark: Before we get started talking about our subject, I just want to talk about some negative cash flow you and I have experienced lately on the golf course.
Dave: Yes, that's more your play than mine.
Mark: You're not supposed to mention that Dave. I don't know if-
Dave: You need a lesson or two.
Mark: I probably need more than that. If we had won some money, I could afford to pay for it.
Dave: Yes, work on your short game please.
Mark: I agree with that 100%. I'm supposed to be driving this conversation Dave, not you. I appreciate that you're our inaugural speaker. That's by design because we think that cash flow is very important and you're the guy to talk to on this.
Dave: Thank you very much, looking forward to the next few minutes with you Mark.
Mark: $1 million, that's a lot of money. Why doesn't it matter?
Dave: The million bucks, if you already have it encumbered somewhere along the line, you need a plan or cash flow budget to make sure that it's properly spent in your organization.
Mark: Just getting $1 million isn't enough?
Dave: No, you have to certainly manage that, not just today, but tomorrow and into the future.
Mark: What if I don't have $1 million?
Dave: That's where cash flow planning and management comes into play at all levels, no matter what business you have. I can maybe share a story with you.
Mark: Please.
Dave: Early in my career where it taught me a lot about cash flow, the importance of cash flow-
Mark: They had calculators back then?
Dave: They did. They did. There were no laptops either. One of my first engagements, I was meeting with the business owner, a very successful business owner. I had spent hours and hours preparing graphs and presentations and discussions about accrual based accounting. They came. I was going to present to the business owner.
Within the first five minutes of that conversation, he stopped me very short in that conversation and said, "Dave, would you share that information with the controller? What I want to know from you is what do I have in the bank? What's my accounts receivable balance? Who do I owe? That's what I want to hear from you each and every week."
Mark: This is not a new concept, looking at cash flow? Not saying that you're old, but this was a few years ago you mentioned about meeting with this business owner.
Dave: No, it's changed. The concept is the same, but technology has really taken a different approach to how you could measure and do things with cash flow now that you probably couldn't do 10, 15, 20 years ago.
Mark: Interesting, maybe some examples?
Dave: One of the things that I like to discuss with our clients is a 13 week rolling cash flow budget. That certainly can be done on a number of tools. Electronically, it's easy to do. You certainly have to step back and read those numbers, but it's an awesome tool that if you stick to it, the results are forthcoming.
Mark: I'm not as smart as you. Maybe can you help me on that? By looking at a 13 week rolling, what could I see? What information could I gain that I might not be able to looking at some other financial statement?
Dave: I do want to go back. I do agree with you. You are not as smart as I am. That's why you're not doing the cash flow presentation. One of the things it really forces the business owner to do, along with the controller, the CFO, the billing clerk, one of the things is it really forces you to look at your billing practices.
That's where a cash flow starts. Are we getting those bills out on a timely basis? Again, I would tell you a lot of decision-makers and business owners think that is occurring when, in fact, it maybe is not occurring. Those 13 week cash flow budgets will expose that maybe weakness in internal control or a systemic issue.
Mark: We're all busy with technology. We get distracted. What if somebody were to say, "I don't have time to do that. I can't do that. It's going to take 40 hours. I don't have 40 hours to do that?"
Dave: Certainly, that's a legitimate reason, time, but that can be delegated to a professional. It can be delegated internally. Somewhere somehow my job, your job, is to force the business owner, show the business owner, find the time to do that activity. Those cash flow budgets and projections, I look at those a lot like going on a diet.
Nobody likes to go on a diet. When they do, they maybe don't stick with that for very long. I find that with the cash flow budgets. They set them up, great intentions, but they just don't stick with it because of time. Again, our job, you talked about the million bucks. Our job is to help them find the time to get that cash flow projection in place.
Mark: I like how you phrased that. You don't like going on a diet, but if you do and you stick to it, hopefully you see some positive results and you feel good about the whole process. Is that what you're saying on your 13 week projection?
Dave: Sure. You begin to see some results very, very quickly in that process. What it really forces the business owner to do is to look out into the future versus, "Hey, what's going on today?" That really, really focuses on the future even though it's 13 weeks out or a quarter out. It's just a little easier to manage that way.
Mark: 13 weeks, would you ever expand it? You talk about looking out into the future. In our next podcast, we're going to be talking to Tim McDaniel about buy sell agreements. Do you ever go beyond that?
Dave: Sure. Certainly, the business always should have an annual budget or a three year projection or a five year projection. Those are important. You've been involved in many of those. Typically, what happens with those long range budgets and forecasts is they gather dust. They go on the back of your desk never to be used again where the 13 week is right in front of you each and every week.
Mark: That's a great point.
Dave: Thank you. I knew that was.
Mark: You got one. We can go home now. That's great. We're going to do a 13 week. What if somebody said to you, "I'll just become a cash basis financial statement. I don't need all these accruals?" What would your comment there be?
Dave: We need to keep both because a lot of regulatory agencies like the bank may want the accrual statement or the generally accepted accounting principle statement, but cash flow is the life of the business. In all likelihood, you probably should keep two sets of records, an accrual and a cash basis statement.
Mark: I thought you were going to say something illegal, like for the bank and for the IRS or something.
Dave: Absolutely not.
Mark: Appreciate that, I'd have to call the malpractice person. We're going to be accrual basis. We're going to do this 13 week cash basis, but this must be for big companies, right? If I just have a small professional services, I don't need to worry about this, do I?
Dave: It is applicable at all levels, regardless of size. Now, the complex issues may change based on the size of the company. What you'll find is your banker, your lender, your shareholders will take more note and interest in your cash flow strategy and your cash flow budget. It's probably the number one document they would look at versus your accrual statement because that's what gets the bills paid. That's what makes the dividend payments. That's what makes the bonus payments and debt payments.
Mark: That's a good point. In your viewpoint, cash is king.
Dave: Cash is king, no question. I cannot spend accrual basis profit, but I can spend cash basis profit.
Mark: You've been talking to my wife?
Dave: Yes, actually. Your allowance is going down, by the way.
Mark: I guess I shouldn't have mentioned that. You mentioned receivables and how that's a starting point for that. If I bill my receivables timely, is that guaranteed to improve my cash flow?
Dave: That's a start. Just sending the invoice out is certainly a start. We have to work on is that timely? Your definition of timely mailing of an invoice may be completely different than mine. It may change based on each industry. After that, the followup has to be very intense. We have to make sure we're getting paid for those services because you, as the business owner, have already incurred the cost for that service. The timely billing or the timely mailing of those bills is just critical.
Mark: You hear clients say they're getting squeezed. What I think they're saying is that my customer is going to pay me in 90 days, but my supplier wants to be paid in 45 days. That seems upside down. That's a negative cash flow aspect there.
Dave: It is. Again, going back to your budget and your forecast and 13 week, that'll help you expose those issues. Then, you can have conversations with the vendor or the customer. You may lead into do you have the right particular customers in place? This cash flow projection just leads into many really, really good conversations that are healthy for the business.
Mark: Obviously, you say positive cash flow. Positive, that's good. What kind of tangible things could a business expect to see out of positive cash flow? Can you paint that scenario for me?
Dave: Sure. One of the things that we look at, especially when you get into the maybe last quarter of the year, maybe the business is looking at an equipment purchase. The cash flow will allow you to take a look. Is that a right way to use the cash? Will that acquisition help us generate additional cash and sales? You may have a bonus situation you want to look at, maybe an employee benefit program, maybe a hit to your profit sharing contribution as well.
Mark: Positive cash flow, negative cash flow, cash is king. Do you ever get concerned that people manage more to that than more to the bottom line? Is it one versus the other? Are they in conjunction?
Dave: They're in conjunction. Each business is different. We know that. We have to acknowledge that. Some of the businesses have inventory. Some use their payables a little bit differently than other entities. You have to look at both sides of the coin on that. Again, I will go back and note what I said earlier. I cannot spend accrual based profit, but I can spend cash based profit.
Mark: In my example we talked about a minute ago about customers paying me in 90, but vendors want to be paid in 45, would you ever suggest a prepayment to the customer for a discount? Or maybe extend the vendor and pay a little more? Is that something that might happen?
Dave: Absolutely, absolutely. That's such a great question because there are many times. You've been in those as well as I have where maybe the business owner or the controller doesn't realize that those situations are going on. You start drilling down on a quarterly cash flow.
That will be exposed relatively quickly when you have those weeks where maybe you're underwater a little bit where your expenses are greater than your cash receipts. You look why and you examine and those situations will be exposed. It's our job, your job, and the business owner to fix it.
Mark: Can you provide me an example of how we might fix that? What might we do?
Dave: It's just like any other relationship. You'd have to sit down with the vendor, the customer and talk about terms and talk about strategies and talk about how are we going to do this to benefit both parties?
Mark: I assume if we have this projection, we'll see that sooner versus later. You'd rather have those conversations like, "Hey, in 13 weeks I might be a little slow paying you," versus the guy knocking on your door saying, "I need my money," and you're like, "Get in line."
Dave: Absolutely. You've heard the term why do we wait until the 11th hour to deal with an issue? It just exposes that issue maybe three weeks, two weeks a little sooner, but it also forces you to have those conversations or fix something internally in your business.
Mark: Interesting. In our example that if we saw that we were losing in the golf match, we shouldn't have pressed because we had an indicator that we weren't going to win?
Dave: No, you've got to believe. You have to take risks. By the way, how much am I being paid for this presentation?
Mark: Goodwill.
Dave: Goodwill, thank you.
Mark: Hopefully, you're feeling the goodwill.
Dave: I feel it. It's great. I can't spend goodwill either, by the way.
Mark: You're not meant to. You're not meant to spend it. Can you maybe give me an uplifting positive story out of somebody who utilized a cash flow projection?
Dave: Sure. This maybe started as a byproduct. We were visiting with a client and I just happened to look over in his office. On the floor there was a stack of paper about a foot high. I said, "What in the world is that?" That's not exactly the terms I used, but through that conversation-
Mark: You are PG here.
Dave: That's correct. I found that that was last week's invoices, so we were told. As we looked at it, there were some invoices on that floor that were over 30 days. That was the start of, "Let's get these things billed. Why are those on the floor?" We put a new system in place and got the cash flow rolling. It took a while, but in that particular case the owner just could not give up control, wanted to look at every invoice before they went out the door. That just was a real struggle on the cash flow.
Mark: Maybe you've just talked yourself into another episode of Unsuitable. Owners get in the way sometimes?
Dave: They absolutely do. Or they bypass a very good system in their accounting control process. Sometimes that just totally gets in the way.
Mark: Interesting concept there.
Dave: Thank you.
Mark: Dave, we're running up on our time. I want to thank you for your time today and your insight. I really appreciate it, the inaugural one and that is by reason. To the listeners, thank you for tuning into Unsuitable, episode one, Why $1 Million Doesn't Matter.