"Adam, I didn't get paid today."
I told her that I'd investigate and get right back to her. When the customer service rep from my payroll provider told me that the bank declined our payroll debit, a lump formed in my throat. Frantic, I logged in to view the company's bank account.
The balance: $0.00
On Friday, there had been over $120,000 of cash in that account. Monday morning, the account was empty. I was stunned. What in the world just happened?
I was a first-time entrepreneur, and had I been asking myself the tough questions about our business along the way, I would have seen quite clearly that a freight train was bearing down on us.
Here are the six questions I should have asked:
1. Do I have the right relationship with my bank?
When the 2009 recession hit, our customers were impacted just like everyone else. At one point, every one of my outstanding invoices was over ninety days aged. As a result, I maxed our million-dollar line in three months.
The bank didn't call me. They just shut down the line. I realized that banking relationships--even simple ones like lines of credit--are critical assets when things get tough. I hadn't put in the time to make sure my banker understood our business. I could have told them sooner, presented a workout plan, and asked for help.
Lesson: Once the stuff hits the fan, it's too late to make friends with your banker.
2. How many days can I run this business without new cash flow?
With a bounced payroll to remedy, I took my entire personal savings and put it into the company.
We had 20 days of cash left before I was out of business. The next payroll would wipe me out. Game over.
My customers owed me over a million dollars, and the key to the company's survival was my ability to get our customers--themselves struggling in a tough economy--to pay me what was owed, and fast. Every check meant another week of survival.
Lesson: My weak collections process created major cash flow problems.
3. Do I have a customer concentration issue?
While dialing our customers and begging for payments, I realized that two customers accounted for forty percent of our revenue. The concept of customer concentration risk became very real for me.
Large, profitable accounts made life easy for us. We did great work for them, and we grew the business. But it was a house of cards. Having two accounts representing nearly half our revenue base was a massive risk to the business, no matter how secure I considered these accounts.
Lesson: I hadn't built a predictable model for landing new business.
4. Do I have the right business model?
We delivered service for the customer, then sent the invoice. Sixty days later (theoretically!) we received a check. The business model I had created required me to finance sixty days of working capital. When we received payment, almost all of it went to pay expenses that had already been accrued, leaving only a few points of profit margin.
Lesson: Running a high-growth, receivables-based business with low profit margins is a recipe for disaster.
5. Is everyone on our payroll delivering tangible value?
I'm a loyal person. When the economy started to turn south, I knew I was carrying people we no longer needed, but I held on to them out of a sense of obligation as well as hope that we'd land that next account in time. It was a jobs program that I couldn't afford to operate.
Lesson: Had I rightsized my organization sooner, I would have had sufficient cash to cushion the impact of a slowing economy.
6. Do I really need to be spending money on that?
When forced to examine every expenditure down to the penny, I stared to wonder about all of the technology tools subscriptions and the other little things that bleed off cash flow.
I was running a business with a net profit margin of about five percent. Said differently, for every one hundred dollars I spent on something, I needed to produce two thousand dollars of revenue to afford it. Looking at my expenses through this sense made decision-making a lot easier.
Lesson: Little expenses add up to a big cash drain.
Fast forward to 2010: With the help and support of a few extremely loyal individuals, we stabilized the business and I managed get out from under a debt load that almost certainly would have pushed me into personal bankruptcy.
What did I learn from not making payroll? I learned what it takes to truly run a business.