The Cash-Flow Quagmire
A founder discovers it doesn't take very long to screw up a company. Maybe even as little time as two or three months
Call me paranoid, but there's one thing I won't delegate to someone else: watching cash flow. Once, I took those lovely ideas of empowerment, trust, and the like, and followed them off a cliff. Then we had to reawaken to our real jobs, go home to our original values, and begin the long trek back to financial health. One of the hardest lessons I ever learned was that I could not serve my ideals if I lost track of cash flow and collection.
When my husband, Phil, and I started Racing Strollers, in 1984, to sell the strollers he had designed, our systems were simple. In those early years our cash-flow system was to run to the mailbox and pray that some checks had come in. As we grew we picked up some sophistication -- a pencil and ledger page with a cardboard box of accounts receivable. I'd pull out each invoice due us and laboriously write that amount down in the month and week I guessed it would come in. But our guesswork was pretty good. We usually had enough money to pay the bills. I could predict when we wouldn't, and I'd trot on down to talk with my banker.
My method was sort of hokey, but it worked. At one point I remember being assigned to come up with a pro forma income statement. And instead of being intimidated and running to an accountant, I puzzled through some accounting books and set it up myself. It was fascinating to have to think out the formulas. I ended up calling the last line "real-life cash" because that's what it was to me. Bankers always smiled when they saw that. And yet for a young president, I knew my numbers backwards and forwards. And I got my loans.
So we were bobbing along, doing OK, and then we got a yearning to get fancy. I began to believe the conventional wisdom that I heard endlessly: a young, rapidly growing company needed an experienced controller. We needed experienced managers who had worked for large companies to "take us to the next level." So I found someone who met that description. We hired a big-city, big-company, experienced controller. A nice guy.
Before long, all our reports started looking a lot fancier. I couldn't understand them. Each time I read one I had to look up humongous words, like subordinated debt -- so for months I just scanned the reports and looked for the ending cash line. We were in an upswing: growth was up; profits were great; our star was clearly ascending. What could go wrong?
Now, remember our situation. In my small company (30 people at that time), I was the only person who had really understood the old cash-flow reports. (I had become CEO by then.) We shared statements with everyone, but no one else had ever built a pro forma one from the formulas to the logic. And I was happy to believe in the new controller's balance sheets because I was no longer up till one a.m. doing the reports myself. "Ah," I told myself, "isn't it great to delegate!" Our new controller walked like a duck, quacked like a duck, and was terribly nice, so we all assumed the reports were right. That assumption was fatal mistake number one.
The second fatal mistake was to get distracted. Cash flow is everything, period. (If this article reaches one rosy-cheeked entrepreneur cutting a big deal and thinking, "I'm after a Big Sale. I don't have time for this now. I'll get to it later," I say, "Jump on in, the water's fine -- not!") And did I ever get distracted. We were doing our first big deal with a major company. We had vice-presidents calling us on weekends. Plane trips to their lovely city, lunch in the employees' cafÉ, celebrities shaking our hands. And guess what? I forgot to watch the home business. I thought I was like them, the corporate types, and could leave that to the accountants.
It doesn't take very long to screw up a company. Two, three months should do it. All it takes is some excess inventory, some negligence in collecting, and some ignorance about where you are. We had decent systems for a little company, but how do you know if your systems break down? I know, I know, excess inventory is the oldest mistake there is. But we'd never had it before (we usually ran on a 28-day cycle), so we weren't clued in to watch for it.
I began to realize we were in trouble when I called in from a business trip. I said, "Wow, the inventory is doubled! Aren't we out of cash?" Now, this part hurts. I was told, "Oh, it's a little tight but not really bad at all." And I wanted to believe it. I didn't have time; the Big Deal was going hot and heavy. Then I returned home and started to get that sinking feeling. My controller was looking a little gray around the gills. He finally admitted that we might be in a little trouble. Then a lot of trouble.
I took a statement home and spent a Saturday reading it, every line, the way I used to. I wanted to throw up. We'd had a record year. We'd hit all our profit goals. All our employees had worked their hearts out, and they'd done everything we'd asked them to. And we had fallen off the cliff. That was the worst part of all for me personally -- the layoffs. If I could have fired myself, and someone else could have walked into my job, I would have done it in an instant.
We were so out of cash it was pathetic. We needed to raise money, and quickly. As I met with potential investor after potential investor, I concluded that if one more guy in loafers gave me the instant pocket analysis after five minutes of small talk and not too many questions, I'd scream. But I kept going to meetings and being more polite than I ever thought I could be, because when you need better cash flow, it's like needing air.
And while I was looking outside, the money was on the inside. Reluctantly, I hired an expensive consultant for advice. He walked around for a few weeks but actually found what he was looking for right away. "Why are you trying to raise money?" he asked me. "I have to," was my reply. "No, you don't," he said. "Why don't you collect what's owed you?" Now, I wasn't the only one in this deal. We had our managers, our controller, and a staff that saw reports. We had my outside professionals and an advisory board we had formed to help the company through this. And none of us thought to look where we should have gone first: accounts receivable. A couple hundred thousand dollars were late, and no one had had the time to collect them.
Around this time we decided to let the controller go. We also brought back Marsha Euper, a longtime employee who had left under his tenure. Her specialty was collection, and she went to work in her usual way. She's totally sweet to her stores (our customers) and completely relentless. We had money coming in very quickly after that, much more quickly than I could have put a deal together.
As a result of surviving that crisis, here's what we do now: I always spend hours reading the income statement and key-item analysis, but we're all involved in watching cash flow. We're all financial people, and our training programs reflect that. All our managers and all accounting people get our daily cash report. We all see daily where we are and what big checks need to be written in the coming weeks.
Well, we're still here. We survived it. There was a terrible price, though: we let more than half the company go when the debacle began. (We were overloaded on overhead, but the fancy reports weren't working well enough to show it.) Most important, we learned to make all decisions based on cash flow. Actually, we had done that when the company began. We just forgot it along the way. These days if somebody needs a new desk, we're downright stingy. We always look at the cash impact and ask, "Is this absolutely necessary?"
Now me, I always want to make all decisions based on what's best for our customers. So we have to balance that in. And when doing the right thing for the customer wins, as it should, we still always ask, "What's the cash impact of this decision?" So we make a conscious decision and one that will keep us here to take care of customers years from now.* * *
Mary Baechler is cofounder and president of Racing Strollers, a 10-year-old, $5-million company in Yakima, Wash.