Key points from this chapterNow let’s talk about money problems. Sufficient cash flow is essential to your success and well-being. Every businessperson learns, usually the hard way, that there is a big difference between assets and cash flow. You can have massive assets—large companies might have hundreds of millions in assets—and still go out of business because you lack cash flow. It’s something about which businesses and families must be constantly diligent.
Don’t feel ashamed that you lack the cash to pay your expenses. It can happen to the best of us. If General Motors can have a cash flow problem (and it has many times) you can, too.
Here’s how to handle a shortage of cash in your business. The same rules apply to your personal finances.
You must make payroll
Your biggest business priority when you run out of cash is payroll. In business if you miss one payday, you are out of business. If you are not able to make a Friday payroll for your people, you will have to close the doors on Monday. If you can’t make payroll on the 15th of the month, you must shut the doors on the 16th. Don’t be fooled by thinking, “My people love me. They’ll understand.” No, they won’t. Try missing one payday and see how much they love you.
Making payroll becomes your key priority. You need to do a cash flow projection for the next three months, using projected income figures that are realistic, not hopeful, and be sure that you will be able to meet payroll.
If it doesn’t look as though you will have enough income to make payroll you’re going to have to reduce your payroll costs. Nobody enjoys doing this, but it is essential to your survival.
As you think about the people who work for you, you will probably think of one or two people whom you wish would quit. Perhaps they’ve been with you a long time and you have a strong sense of loyalty to them. Perhaps they have been made redundant by technology. Are you still employing a full-time bookkeeper now that computers have made the job possible to do in one quarter of the time? Do you still have someone answering the phones when most of the calls go through to an answering system anyway? Do you still have a vice president of mimeographing locked away in the basement? If you’ve got anybody on payroll that you wish would make your life easier by quitting, you need to take action right away. Get them out of there!
If you’re conflict averse it will probably occur to you that instead of firing people you should cut back everybody’s hours. That may be a temporary solution if you are between orders and will need all of them in a month or two, but there’s a real danger that you make everyone unhappy when you do that. It’s better to let some people go and let them collect unemployment compensation for a while. Hopefully you’ll be able to rehire them when business picks up. If you cut everyone’s hours, you’re just passing on your cash flow problem to your employees.
Here’s a tip for you: Consider how conflict-averse you are. Some people love a good fight. Their idea of a fun evening is to go to bar and pick a fight with someone. If they are in the military, they want to be on the front lines where the action is. That’s not me, and perhaps it’s not you either. If you’re conflict-averse, there’s a high probability that you have failed to take the tough action that a businessperson in a cash flow crunch needs to have done.
Having terminated the people that you wish would have quit, consider the poor producers. Do you have salespeople that are having a tough time making their sales quota? Perhaps it’s time to let them go and reassign your sales territories.
The key issue with reducing payroll costs is that you must be proactive. If you don’t take control you’ll find that the people who leave will be your best people because they have an easier time finding another job.
How to fire someone painlessly
I’ve fired dozens of people in my business career and I’ve never enjoyed doing it, but I did develop a way of doing it with as little pain as possible. Call them into your office and talk about the problems you’re having until they realize that they’re about to get fired. Then their interest is accepting your decision with the least amount of unpleasantness.
If the issue is their poor performance you might say, “Joe, when you joined us six months ago we had very high hopes for your performance. We set some challenging sales goals for you but felt confident that you would make them. As you’re well aware, that hasn’t happened. As of the end of last month you’re still 28 percent off of your quota and that’s just unacceptable.” At this point Joe is getting the idea that he’s going to get fired and wants to get out of there gracefully just as much as you do.
If the issue is a bad economy you might say, “I’m sure you’re aware that we’ve been going through some very tough times lately. Business is down 38 percent from last year and we’ve come to the point when we have to adjust our payroll. We hate to let anyone go, of course, but it’s come to the point where we have to take action or risk being out of business altogether.”
Be sure that you have firmness and certainty in your voice. You are telling about a decision that you’ve made, not starting a conversation or, worse yet, an argument.
Get back to your core business
If you run a formerly successful business that is now suffering a cash flow problem, I’m pretty sure that I can identify your problem: You have diversified away from your core business.
A good friend of mine used to be a business consultant for a nationwide consulting firm. His job was to go into a company and investigate their business problems. He told me, “Roger, almost invariably I knew what their problem was the first day I got there. But I couldn’t tell them then because I had to justify the huge bill that we were going to send them. I would work diligently for a couple of weeks and then tell them.
“If a company was big enough to pay us our fee it meant that they had at one time been very successful. Their problem was that they had diversified away from their core business. Perhaps they were eager to grow and had already saturated their industry. Sometimes they just got bored and wanted a new challenge. Sometimes they had developed a Messianic complex. They were convinced that they were so good that they couldn’t fail at whatever they tried. My advice was always the same: Cut out the fringe stuff you’re doing and get back to your core business.”
Does that apply to your business? Have you expanded your product line or the services you offer to the point where the profit from your core business is just going to subsidize the money you’re losing in your fringe businesses?
Control your expenditures
The next step is to get control of your expenditures. You must defer all capital expenditures—no new equipment, no unnecessary trips or purchases, unless they will result in income. You need to take personal control of this. Let all your people know that every expenditure over $20 must be approved by you in advance.
However, don’t overreact. Don’t frustrate your people by nickel and diming them to death. They need pens with which to write, they need paper to write on, and they need to be able to pick up the phone. You can contain your expenditures by controlling the larger items such as travel, long distance calls, and equipment purchases without making it difficult for your people to function from day to day.
Prioritize your bills
Next you need to go through all of your bills and prioritize them like this:
A. Must be paid now or you’re out of business. This would include utilities, telephone, and Internet connections.
B. Are critical to be paid (such as rent). Contact these people and use your negotiating skills to get them to give you concessions. In a cash flow crisis you tend to think that some things (like lease payments) are non-negotiable. Don’t think that way. Everything can be re-negotiated.
C. Do not need to be paid now (such as bills from vendors, printing, promotional supplies).
Contact the B and C bills when they are 30 days past the due date and explain that you are in a temporary cash flow problem because some key customers let you down. It’s important that you contact them before they call you to complain about slow payment. If it’s already too late for that, call anyway.
You must take a very firm stand on this issue. Resist the temptation to pay a vendor who is angry with you. Resist the temptation to pay off small bills, because you can afford to. It’s essential that you get these payments deferred so that you can build up a reserve of operating cash. Do not agree to any late payment or interest charges. If vendors ask you for penalties, tell them forcefully that to do that would only put you further into trouble, and you cannot agree to that.
You are going to have to talk very strongly to some creditors. You may have to tell them, “You can take me to court if you want, but it’s going to take you two years to get your case heard. Plus it would only force me to declare Chapter 13. Only 10 percent of firms that file bankruptcy ever recover, so then you’ll never get paid. If you’ll work with me you will get paid.”
Some larger creditors may ask you to sign a personal guarantee for the loan if you want it extended. You should never do this.
Partners profit distributions
You cannot justify paying the partners profits when there are no profits to distribute. You should still receive your salary for running the company and expense reimbursement for company business, but you cannot pay yourself a profit distribution. You must defer this outflow of cash. And of course the same has to apply to any shareholders or venture capitalists.
Arrange a line of credit before you need it
If you have financial backers, approach them now, explain the problem, and (very important) outline in detail what you are doing to correct the problem. Tell them that you hope you don’t need it, but you need to know that you could draw on a line of credit if necessary.
Approach your banker for a business line of credit. One that you will only draw upon if you need it. Do not sign a personal guarantee.
Set a personal example for your people
Your people need to see that you, too, are on the austerity program. Avoid taking clients to expensive restaurants. If you have a staff meeting, where you normally would have gone to a restaurant, have it in the office instead and order in sandwiches or pizza. If they see that you are being frugal, they will also hold down their expenses.
Remain cheerful, calm, and confident
As we say in sailing, “The crew must never see fear in the captain’s eyes.” You need to display leadership skills here. Don’t confide in even your closest employees that you are worried. Let them know that you understand the problem and you know what to do. You are taking some tough corrective measures right now, but everything will work out fine.
Remember that worry never solved anything. Focus on the solution to the problem, not the problem.
Avoiding future cash flow problems
Having survived a cash flow problem, you need to take action to avoid a repeat of the problem in the future. Most people who survive a cash flow crisis are so “scared straight” that they’ll do anything to avoid another one, but let’s talk about how you’re going to do that.
You must a have a written business and personal financial plan. It’s not good enough to be thinking, “I’ve always been able to survive in the past. I can handle the problem if it comes up.” Acknowledge that you may not be hard-wired for detailed planning. It may not be your strong suit. Perhaps you think of yourself as risk taker who is successful simply because you take financial risks when others wouldn’t have the courage. Forget all that. You need a written and personal financial plan.
If that seems like the most boring thing in the world to you, you need to get somebody to do it for you. You need someone who can warn you when you’re slipping into financial problems.
Life is a lot less stressful when you’ve got money in your pocket
This may sound ridiculously elementary, but you’ve got to start saving money for when you’ll need it.
A young person called me for advice. She was overwhelmed by the stress of everyday living. I told her that things are a lot easier when you’ve got money. I can remember when I was young and I had to spend $20 to fix my car. Coming up with $20 was a problem when I was just getting started. It ruined my day. Life is a lot easier when you’ve got a Ben Franklin folded up in the corner of your wallet.
Start saving money now. When I first got a job and was making $93 a week, I would take $18.75 of that and buy a U.S. savings bond each week. It cost only $18.75 to purchase, but would be worth $25 when it matured. When you’re grossing $93 a week it takes a great deal of discipline, extreme dedication, and a strong desire for a better life, to keep you from succumbing to the temptation to dip into your savings. Those meager savings enabled me to buy my first house the following year, and my second one the year after that.
Mike Summey, my writing partner on the Weekend Millionaire series of real estate investing books, got his fortune started by saving the change from his pockets. He had a big old plastic water bottle in his closet and filled it up with his loose change at the end of the day.
If this is too elementary for you, please pass it on to a young person who hasn’t figured it out yet. If they would avoid running up credit card debt and have the discipline to delay purchases until they can pay cash, it will eventually make them millions of dollars.
The same advice applies if you own a big company. Put a little of your profits into a liquid investment fund so that you won’t suffer a cash flow problem in the future.
Key points from this chapter
Having cash flow is more critical than having assets.
A cash flow crisis can happen to the best and the largest of companies.
You must make payroll. If you can’t make payroll you’re out of business, however loyal you think your employees are.
Take the pain out of letting people go by talking about the situation until they realize they’re getting fired.
If you have diversified, get back to your core business.
Control your expenditures. Let your people know that they can’t spend more than $20 without your okay.
Prioritize your bills. A bills must be paid or you’re out of business. B bills are critical to be paid but perhaps you can renegotiate. C bills need to be paid eventually but not during the cash flow crisis.
Suspend all payments to partners and investors.
Arrange a line of credit before you need it. Approach your investors first and then your bankers. Don’t let them talk you into a personal guarantee.
Be frugal in all your activities so that your people can see that you feel their pain and are serious about controlling expenses.
Never let your people see fear in your eyes.
Have a written business and personal financial plan. It that’s too boring for you, find someone who loves detail work and have him or her do it for you.
Start saving money now so you won’t have another cash flow problem.