The Cash Flow Blog

The first report is in — Utah’s experiment with a 4-day workweek appears to be a success.  In the first year of the program, the state reduced it’s operating expense by $4.1M.  That may not seem like a lot to some, but it’s significant as a result and begs the question of how much greater a return it can net?

Savings were found where you’d expect — for example, energy and janitorial. The surprise came in the reduction of overtime.  Preliminary conclusions are working four 10-hour days reduced the need for overtime by allowing more work to be produced in a given day.  Interesting.

Employee moral was reported up as well.    Although the article didn’t mention it, I’d be curious to see what affect there has been on sick-days — Do people who work four 10-hour days a week take less sick time than employees who work five 8-hour days?

Regardless, changing your work schedule should be considered as a way to smartly reduce cost.

What do you think?

In case this post is read years from now, let the record reflect times are tough for a great number of businesses and businesspeople — I’m writing this is October 2009.

The date of this post has nothing to do with the information that follows.

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I’ve maneuvered through a number of layoffs.  In fact, I’ve not only closed many offices on behalf of a company and personally delivered the layoff message one-on-one to dozens of employees, I’ve actually laid myself off.  But that’s another story.

I’ve seen a number of businesses struggle to survive.

Over the last year or two, countless people have lost their jobs. Some soon after lost their homes.  Both are terrible losses.  Life changing.

And the more you cut, the more you put those left behind at risk.  It happens more than it’s talked about.   It’s death by a thousand cuts.

What happens is a business reduces expenses in an attempt to survive.  The expense cut is staff.  Things look good for a while, then not so good.  And another staff reduction is exercised, and so on.

There is a limit whereby cutting expenses doesn’t work.  The point of no return is when operational capacity is pierced.  At that point, the cuts you make to staff limit your ability to produce, deliver, and support in your market.  Revenue falls.  And expenses need to be cut again.

Yes, this is over simplified.  But it’s true nonetheless.

The point is in an attempt to manage a cash flow problem and faced with a staff reduction, be sure you understand what’s being cut and the result.  Be sure to review and revise revenue forecasts, as well as your ability to produce and support the products and services you offer.  Then cut deep enough the first time to get ahead of the problem.

Don’t let your business slowly die one cut after another.

What say you?

There may be times in your business-life when there simply isn’t enough money to pay all the bills.  Regardless of intent, you may not be able to service all of your debt.  At times like this, what are you to do?

Reality is, not all bills are a like.  So, for the sake of this discussion, let’s eliminate all bills such as utilities and non-strategic suppliers.  For the moment, let’s only consider business debt from strategic suppliers, partners, and similar business relationships. When you get behind in payment, what should you do?

Here are six tips to handling a business debt you can’t immediately pay:

• Communicate – The first thing you want to do is communicate with the company or individual you owe money.  Don’t run from them, return calls, and be honest about your cash flow problem.  Avoiding the problem doesn’t make it go away and lack of communication only escalates the issue.  Simple communication can make many problems smaller than first believed.
• Ask for terms – If payment is due in full, ask if a partial payment can be accepted.  Often the person or company you’re dealing with will give terms when asked.  For them, it may be an attractive way to manage their risk and exposure in the money you own them.
• Try to find an area of flexibility  – Related to asking for terms, discuss with the person or company you owe what their immediate needs are.  You may find they have an immediate need for money you can satisfy.  You don’t want to appear to be haggling over the money you pay, but sincere in trying to help them while asking for help yourself.  Look for a win/win solution you both can live with.
• Don’t make a promise to pay you can’t keep – This is a common problem.  You feel a bit embarrassed and desperately want to make a payment as soon as possible so, you give your best case scenario for payment as an expectation.  And then miss the expected payment date by days, weeks or months.  Your credibility is lost.
• Don’t overextend – Don’t make a payment that’s greater than you can realistically afford.  If you think you can pay $X, but feel safer paying $Y, discuss paying $Y.  What you want to do is be sure you service debt, but don’t dig yourself into a larger cash flow hole.
• Look for opportunities to factor a  receivable – Factoring is a legitimate business relationship with a lender whereby you sell your accounts receivable at a discount.  The buyer pays you immediately and collects the payment from your customer.  The discount percentage can vary and not all receivables are credit worthy of factoring, but for some companies this is a wonderful opportunity.  You can use the money you receive to service debt.

There are six tips to handle a business debt you can’t pay.  What would you add to my list?

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UPDATE:  Think twice before you use a credit card.

When under cash flow stress, there is great temptation to pull out your wallet and fix your cash problem with a credit card.  Many business leaders have done it.  And many, if not not most, have lived to regret it.

I’m not talking about using credit cards to pay routine business expenses, we all do that – web hosting, travel, etc.  I’m speaking about using credit cards in volume to pay expenses such as payroll and rent when you’re facing a serious shortage of cash in your business.  In cases such as this, you should seek short-term lending from your bank, investors, and other lending sources or you should take aggressive measures to quickly lower expenses.

The problem with using credit cards to address cash flow problems is it’s digging a bigger hole to bury yourself in later.  Credit card debit comes with outrageous interest rates and can be as addicting as crack.

Credit cards look good in a cash flow crisis for several reasons:

• easy to use
• immediate access to money
• low monthly payments
• puts the immediate problem behind you

But here are the realities:

• high interest rate
• doesn’t fix the problem, just pushes it to the next month
• makes your cash flow problem worse as next month you have the original expense and need to service the credit card debt
• gives a false sense of relief and can stifle action to fix the underlying cash flow problem

Two quick stories.

I know someone who periodically floats rent and sometimes payroll with credit cards – giving himself a temporary loan while awaiting receipt of customer payments.  It works for him and he hasn’t been bit yet.

I also know a person who had a serious cash flow problem in their business and used credit cards to manage their way through it – $100K in credit card debt later they called it quits.  Years later they are still working to settle their debt.  When asked how it happened, this business leader answered “It was easy to get the money and we thought we could get ourselves out of the mess in a few months.”

Think twice before you rack up credit card debt to pay business expenses.

Related, if you’re interested in FICO scoring – how it’s established and its importance to accessing credit of all type – here is a nice article that breaks it down nicely and easily explains the importance to all borrowers.

Lenders are tightening their standards for new loans and credit cards, and they’re paying close attention to an applicant’s credit score. That score, called a FICO score, often determines whether you’ll get credit and at what interest rate. ~via npr.org

Part of the story is how your use of credit cards and other available credit can lower your FICO score, thereby increasing your cost of moeny while deceasing your access to funding – a double-edged sword.

A cash flow management suggestion I recently read is to migrate a sales team from a salary + commission compensation plan to a commission-only plan.  The thought is by doing so, cost of sale can be greatly matched to revenue.

Salary and benefits are a huge portion of the cost of sale and as such, the thought is to only pay the sales team when they sell something.

Makes sense in many cases, but not as a means to address a cash flow problem.

I’m not talking about indirect sales models, but changing compensation plans of existing sales personnel from a salary + commission compensation plan to a commission-only plan in an attempt to save money in the midst of a bad time.

Here are some things you need to consider before moving your existing sales team to a commission-only sales compensation plan to address a cash flow problem in your business:

• Complexity of sale and it’s impact on sales people – The cash flow question is why make the change from salary + commission to commission-only?  Assuming the reason is to make it through a bad time and conserve cash, you have to look at the complexity of the product or service you sell and realize the impact of making such a change.  Things like length of sales cycle, dollar value of the average sale, time to cash after the sale, percentage of commission, risk of return and it’s affect on commission payments, etc. all need to be considered for their impact on the people you’re moving to a commission-only compensation plan.  Remember, the person selling for you has to eat and provide shelter for themselves and most often others.  How long will they be on such a plan, how much money can they make while on the new plan, how often will they be paid, how much risk in the business will they carry, etc.  All of these questions need to be weighed if you value the people on your team and want to keep them around.
• Turnover – How many sales people do you expect to lose because the compensation plan is changed?  Odds are you aren’t closing a lot of business, otherwise you wouldn’t be considering a move to a commission-only plan.  Realize doing so likely will force your best sales people to seek employment elsewhere – if they haven’t done so already.  If things aren’t going well, why would a top an average performer stay in a company that just took their salary and benefits away?
• Quality of new personnel – Related to the item above, what kind of quality sales people do you expect to attract to your company on a commission-only plan?  If sales are hot and the commission rate is great, the earning potential may attract quality people.  But again, we’re talking about changing a sales compensation plan to commission-only because things aren’t going well.  Any new-hire worth their weight will want to speak to other sales people about the commission-only plan and ask questions about the length of the sales cycle, pricing, lead generation, timeliness of payments, and real earnings versus potential.   The danger is good people will leave and less quality people will replace them, making poor sales results get even worse.  Eventually, things will turn around and at that point you want the good people with you.  Under-performers should be let go before and regardless of a cash flow problem.
• Desperate acts of the sales force – Take salary away an employee in an effort to save money and pay them for performance…and watch out.  Not everyone will react the same.  Some sales people will turn to acts of desperation – over commit, over sell, make promises that can’t be kept, discount beyond authorization, hassle and annoy for a closed sale, obligate the company in ways that result in great financial risk, etc.  Not everyone will change who they are, but don’t be surprised if the guy or gal with three kids to feed suddenly starts making promises to customers they can’t keep in an effort to close a sale in time to earn a commission before a mortgage payment is due.  I’ve seen this happen.
• Control – Sales people who are paid commission-only are likely to be more difficult to manage.  The reason is they don’t have much to lose.  If sales are down and people aren’t making money, asking them to work harder isn’t going to be well received and threats of firing them aren’t going to be taken very seriously.  Can you really fire someone you aren’t paying?

None of the above is meant to dissuade people from adopting commission-only sales compensation plans.  What’s meant is to be aware making such a such a change in an effort to address a cash flow problem can be dangerous.

As business owners, we’re all on a commission-only plan.  More accurately, many or most of us are on a profit-based compensation plan.  The caution to have is our employees don’t share our mindset of success or dedication to our business – not as a general rule of thumb.  And changing the compensation plan of a sales team to make it through a rough time, while making perfectly good sense as a business owner, has potentially unintended consequences we need to be aware of.