November 14; Nothing happens Until Someone Sells SomethingAnd Receives Payment MANAGEMENT BY THE BOOK:365 Daily Bible Verse &One-Minute Management Lessons For The Busy Faithful
The rich rule over the poor…
Nothing happens Until Someone Sells Something—
And Receives Payment
Philosopher and theologian G. K. Chesterton once said that anything worth doing is worth doing poorly. He wasn’t talking about sales and receivables, however.
Our little company was doing the hockey stick. Our sales were taking off just as we had projected in our (wildest) (fantasy) business plan. But our banker-backers were not happy. They were talking bankruptcy.
High sales covers all sins. Or do they? Is it possible to sell your self into bankruptcy? Where payables (money I owe vendors) run too far ahead of receivables (money customers owe me). And where receivables are too far behind payables.
A health food store in Los Angeles was so successful in building sales that the manager opened 14 stores within 18 months.
With insufficient financial resources, a brand name not yet established, and having not yet mastered the intricacies of the supply chain within the industry, he was bankrupt in the nineteenth month. (Cohen 2012) Page 174
The great challenge in a high growth business is in funding receivables. If a company is growing at more than, say, twenty percent a year, the company will have to buy some debt or sell some equity.
It is not only that growth that must be bankrolled, but also survival while waiting for the money to come in for the goods and services already sold.
Selling might be easier than collecting.
This is why managers like the cash flow statement more than any other money measure.
I once bought T-Shirts for my staff emblazoned with, “Happiness Is Positive Cash Flow.” I had to remind them of their manager’s priorities. And it was catchy. “Creating a Customer” sounds, well, academic (apologies to Peter Drucker).
Professor Bill Lazier at the Sanford Graduate School of Business catches my mood. In his classes, he,
Would walk over to the chalkboard and write in giant letters…CASH.
“Never forget,” Lazier would say. “You pay your bills with cash. You can be profitable and bankrupt.”
Business guru Jim Collins continues, “Leaders in successful companies worry more about earnings. But organizations do not die from lack of earnings. They die from lack of cash.” (Collins, 2009)
Here’s how it works:
In week #1 a widget that costs $50 is sold for $100. Invoice is sent and payment is expected in 30 days.
On week #2, four widgets costing $200 are sold for $400. Invoice is sent and payment is expected in 30 days.
If this trend continues, then this is a good thing: doubling sales.
But in the first 30 days we spent $1,450 and brought in $2,900.
We have nothing until the customer pays the invoice.
Cash flowed out and nothing came in. While we waited for payment we would be working in our unintended side-business as a lending institution to our clients. Banking was not our business as our board of advisors advised us.
Let’s do the math in the increasing sales. In month number two we will need $24,000 to build the widgets and we still may not have had any checks come in. Our customers were enriched by our products. But we were cash-poor in a poor position.
Until the invoices are paid, we did not know if we have clients who are a ‘slow-pay’ or deadbeats who will be a ‘no-pay.’ We would be “ruled” by those who have our money.
We were selling ourselves into bankruptcy. Fortunately we had patient investors and aggressive bankers who kept us liquid and didn’t quit. But not because they were nice guys (ha!). They wanted their receivables, too.
We had devoted more effort to speed up our receivables to prove we knew how to do business. And to show that we were in control of our finances.
The rich rule over the poor…Proverbs 22:7a
Drucker on Marketing, Cohen, McGrawHill
How The Mighty Fall, 2009, Jim Collins, page 104.