There is an Australian entrepreneur who writes a blog called the Entrepreneur’s Journey. Yaro has distilled some of the lessons he learned, starting from his pre-university days. One of those lessons was the critical importance of conserving cash and reinvesting. He points out that the two primary resources can be interchanged – money can buy you time that you lack, and time can be substituted for money that you lack.
Over the years, I have attempted to demonstrate this to executives – both peers and superiors - who seemed unwilling to grasp this. Management’s fundamental task is to use the resources available to meet the needs presented (management’s, not the entrepreneur’s – sometimes we wear several hats!). This came up most pointedly in mining, where middle management – blessed with a wealth of man-hours and talent – would not grasp the value of adding a small investment in equipment as a substitute for very expensive external contractors. There are always alternatives involving these substitutions.
For entrepreneurs, however, the discipline of a lack of capital resources really sharpens the mind! Yaro mentions postering as an alternative to more expensive advertising modes, and his time invested in postering returned dividends. I have used tiny ads put up on supermarket bulletin boards (3D ones!) to find clients, and to find equipment and staff.
Early Cash Flow Generation, Each Deal Counts
Near and dear to my heart though, is his point about early cash flow generation. With my clients, I always knew I had a problem when what was discussed first, and with the most passion, was either technology, or equipment. It took enormous effort to bring them face-to-face with reality. Aspiring entrepreneurs need to learn that the first customer is the most important milestone, and that each customer needs to be a source of cashflow, or equivalent value. Here’s the thing – no customer means no cash, means no reinvestment, means no business.
I was taught my lessons early by a man who owned a chain of steel warehouses. An old style entrepreneur, he would take material inquiries from his customers, and whether he had the product or not, would answer that he had it. If he knew that he did not, he would simply say that he needed to check stock at one of his other locations, and would call back. The checking stock routine came to me, in my role as purchasing agent. Within 30 minutes, I returned with at least 3, and preferably six quotations from our suppliers that would meet the customer’s needs. The customer was quoted, and the transaction sold. It was then my task to get a better price to improve the margin of the deal.
Every transaction was reviewed by this entrepreneur personally. Attached to the supplier’s invoice was a copy of the resulting sale, and he would calculate the margin and cashflow from each purchase. If the purchase was for stock, it was my job to attach samples of sales to the invoice – not accounting’s task – purchasing’s task. When he was not satisfied with the price we paid, I certainly heard about it - -so did our suppliers from time-to-time.
I eventually learned the reason for this approach. Despite the fact that the operation had mill allocations, and bought by the shipload from foreign mills, the entrepreneur viewed business as transaction based. It was not a sale from stock, it was not a sale as a process – it was a single deal, followed by another. In each case, he ensured that there was an acceptable level of cashflow. Time-consuming – yes. Successful – yes. He learned this from his first days, when there was no cash, and each deal was a make or break transaction.
The Aggregate, Abstracted Mode of Business
This type of discipline often gets lost in business today. The current model is one of process, infrastructure, product lines, and aggregate market penetration. Our love of statistics and metrics leads to this type of thinking. It reaches its height in conventional accounting under GAAP. For those who don’t see this clearly, understand that GAAP is designed to REPORT aggregate information to external users of such reports. It is worse than useless to an entrepreneur.
In business process reengineering there is often an attempt to disrupt this type of industrial engineering thinking – assigning the complete process of a customer interaction, for instance, to a single agent. The result of our abstracted business management tools is that there is far less ability to continually monitor transactions, to intervene and correct. Cashflow is NOT conserved.
The Impact of Cash
Cash in the bank is time added back to your life. I stress that your business planning MUST provide for a scrupulous planning of the cash impact of every part of your operation. What exactly is the collection cycle for each part of your market channel mix? How fast is your production cycle? When do payrolls fall due, and when do you remit your withholdings?
I also highly reccomend that businesses implement a cash behaviour and tracking tool that is mostly independent of your accounting system and your planning model. As a corporate and an operations controller, I simply cannot stress enough how important that is. Despite the fact that I have prepared full formal accounting statements under GAAP to securities commissions as a reporting issuer, I would rather live without accounting statements, than live without a decent cash behaviour tool.
And as Yaro points out, it is the continual reinvestment of your cash (your banked TIME) that expands the scope of your activities, and the opportunities you can grasp. My steel mentor? From the roots of a small metals recycling operation, he built an 11 figure enterprise that ranged from metals to manufacturing to real estate to services to venture capital. And I bet to this day, he still marks up his supplier’s invoices with note and calculations in large tipped red felt pen.
Thanks Yaro . . .
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