From the Desk of Steve Colton
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Cash Really is the Life Blood
I’ve been doing the bookkeeping (on a project basis) for a "small" marketing company since August 1st. They do around $2M in annual revenue. Basically, I’m responsible for everything "financial" but payroll and benefits. The company has other 3rd party vendors doing payroll and benefits. Anyway, in the eight plus weeks I’ve been working with this company, I have been struck by how absolutely true is the old maxim "cash is the life blood of small business."

Since August 1st, I’ve probably been asked a half-dozen times "how’s the cash?" In response I’ve prepared an ad-hoc analysis of what cash is available and what cash will be needed for the next 7-10 days. Not once have I been asked about "profitability" or "cost." Just "how’s the cash?"

The partners control costs on a project-by-project basis. Every campaign has a budget and as long as costs fall within that budget, the project will be profitable. The partners KNOW what projects were more profitable or less profitable. What they donít know is when a client will pay for the project and thus the projectís costs...when the cash will come in.

So, there is a real focus at the company on invoicing clients as soon as possible. The company does a "street marketing" campaign and then must deliver a proof of performance to its client. The managing partner is constantly after his field managers to "finish" a proof of performance as soon as a campaign is complete. And then he is after me to issue the invoice. I deliver invoices by email rather than by snail mail or fax. It is the fastest way to get an invoice into the hands of someone who can authorize its payment.

And then the emphasis shifts to collecting on the invoice. One of the first projects I undertook at this company was to develop a process for sending "2nd invoices," followup reminders that invoices were past due. The process is evolving, but prior to my coming to the company, once an invoice was issued, it was basically forgotten until it was paid. Now we formally encourage our clients to pay sooner rather than later.

All of this was driven home in the middle of September. The company had a very busy summer, multiple large projects... large, involved, complex projects. The company managed these projects well and there is no doubt that they were profitable. But from a cash-flow basis, they have been a nightmare. By September, the outflow of cash to pay project costs had overwhelmed the the trickle of revenue coming in. The net effect was to totally deplete the comfortable cash cushion the company had once enjoyed. The crisis was managed through the use of a line-of-credit, but everyone has been just a little uneasy. Yes, it was nice that the summer had been profitable and yes, it was nice that A/R had reached seven figures, but we had to tap the line-of-credit to meet Septemberís payroll. That wasnít nice.

Things have since settled down. The company has received several large payments in the past week and is now on a pace to totally repay its line-of-credit in October. But I’ll remember the experience. CASH really is the life blood of small business.

steve colton
September 30th, 2008