How Much Cash You Have Is Not What Matters Most
Every small business owner and interior design firm principal knows that “cash is king.” And they all know that sometimes there’s more cash than at other times…but seemingly never enough. What they might not know is that that the amount of cash might not be as important in the long term, as just what type of cash it is!
Cash flow can be broken down into four phases, and it’s not so much where you are today, but where you’re heading that truly matters. Think about your own cash flow situation as you read about the four phases of cash sufficiency.
You know this one when you experience it because you’re out of cash and no longer have access to credit. Your run rate (or burn rate) of monthly expenses is greater than any cash available to you. Vendors may have stopped extending credit and payables are getting staler by the week. Remedial actions may be available, but they must be taken immediately.
The symptoms here are pretty much the same as with the Cash Crunch, except that disaster is not quite so imminent. The light on the train at the end of the tunnel is visible, but it has not yet made its way to you. Typically, the feeling here is that something needs to change within 3-6 months, or the Cash Crunch will strike. It’s true that the bigger the firm, the more levers there are to pull and the greater the chances of a turnaround. But even a sole practitioner can “make things happen” in 3-6 months, so long as the warning bell sounds in plenty of time.
Quantity of Profit
This stage represents an erosion of profits over time—the actual bottom line number. Because of the roller coaster of sales, interior designers must be very careful not to let a “blip” appear as the new normal, and keep in mind that blips can occur as spikes in sales, as well as slumps. That’s why when I’m working with clients, I like to average the past three years of sales and profits, and then compare the most recent 12 months to the average. No arbitrary cutoff is perfect, but certainly months and years make very little sense in your industry. If there is an erosion of profit in the past 12 months, then a Cash Shortfall could be on the horizon.
Quality of Profit
I love this term that is almost never written about. Have you ever thought about the quality of your profits? Has it ever occurred to you that $100,000 on the bottom line one year may not be the same thing as $100,000 in another year? When is $100,000 not $100,000? When one of them looks very different than the other in terms of key ratios, most notably margins.
I should mention that these stages are not necessarily mutually exclusive, because in many cases the only thing that separates them is a time horizon. A good turnaround consultant’s toolkit (including mine) is filled with tools to address each of these stages with the commensurate degree of urgency. Most important, is just to catch problems before they reach the point of no return.