The Cash Flow Blog

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.

Economist.com on the opportunity for those businesses with cash on hand:  For the few lucky hoarders, this is a time to feel both smug and predatory.

But your business having cash on hand may not be enough:  …ultra-lean supply chains no longer look like such a brilliant idea when you have to find cash to keep afloat a supplier that cannot get even basic trade credit. “Just in time” is giving way to “just in case”. ~ via Economist.com

The bottom-line is cash flow challenges can extend well beyond your corporate doors.  Your ecosystem of business has to be healthy, as well your home.

Talk to your business partners and customers about their current business environment and experiences working with their customers and suppliers.  Become more aware and in-tune with trends your ecosystem is experiencing and be prepared to move quickly should a partner or customer not be able to weather the current economic storm.

What do you think?  How close should you monitor your business ecosystem for financial health and survivability?

There are times when your business needs money and it’s simply not possible to get it via conventional means – an option you might not have considered is selling shares in your company to a customer or group of customers.  BusinessWeek | Small Business Financing has a post on the opportunity, key considerations and potential pitfalls of such private placements.

A private placement is a streamlined way to raise capital from a group of investors, whether individuals or companies.

I take issue with the first noted benefit – branding – but private placements certainly lead to increased loyalty and understanding from those who invest.

A potential pitfall overlooked is competition in B2B environments – will your agreement to sell shares in your company restrict your market opportunities as they apply to companies your new investor considers competition.

Private placements shouldn’t be looked at as a cash flow strategy, but for those of you in need of capital and find it out of reach, private placements are something you should consider.

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.

I have a small collection of cash flow books, many I’ve been sent over the past couple years to read, review, and comment on.  A couple are written by people you may be familiar with, but the majority are unknown sources – at least previously unknown to me.

Flipping through one book in particular the past couple days it struck me how much bad advice the author was extending to the reader.  The title of the book and author aren’t important, I’m not interested in calling-out a person over what I believe is bad advice.

And it’s not the point of this post.

The point I’d like to make – and thought I’d like to share – is be cautious of the advice you take and act upon.  Especially in tough economic times and uncertainty, the temptation to jump on guidance from an authority can be great.  Most especially when facing a cash flow problem and feelings of pending doom.

Be sure to weigh all advice you get and make sure you think through the consequences of taking a recommended action.  What may be great advice for one business can have devastating consequences for another.

For example: What prompted me to write this post is the advice in the aforementioned book to change the compensation plan of all sales people to commission-only – eliminating salary and in many cases benefits.  The author’s rationale is saving money and changing a huge chunk of sales expense to a pay for performance plan whereby revenue offsets payroll.  My problem with this advice is it’s never qualified by market, circumstance, complexity of offering, etc.  And the advice is never balanced with potential consequences of making such a change – turnover, customer impact, account management, quality of employee, hiring challenges, acts of desperation in the sale force, etc.

My point in this post isn’t to challenge advice to change your sales team’s compensation plan. That’s a conversation for another day.

What I want you to take away from this post is awareness hard times can create an incredible sense of urgency to change and take immediate action.  When faced with such urgency, be sure you think through all of your options and evaluate the possible and probable consequences of the action you take.

With all advice and opinion, we all need to weigh it carefully and make as informed a decision as humanly possible.

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Update #1:  Here is a link to a post on why changing sales compensation plans to meet a cash flow challenge isn’t a good idea for most businesses.

Update #2:  Here is great realted advice from Seth Godin on resisting the tempation to jump on get rich quick offers in bad times:  If someone offers to sell you the secret system, don’t buy it. If you need to invest in a system before you use it, walk away. If you are promised big returns with no risk and little effort, you know the person is lying to you. Every time.