Black and White

In a cash-flow crisis, does getting money in the door mean ethics must go out the window?

The CEO of a fast-growing software company was three weeks away from facing a payroll he knew he wouldn't be able to meet. Then a check for $94,000 showed up on his desk.

That amount, as he was instantly aware, was more than enough to cover a full payroll period, relieving him of an oppressive burden and ensuring that his six-year-old company would stay intact. Until the next payroll came due, anyway. "At the end of the month, I'm just relieved when all the numbers work," says the CEO, who had never missed a payroll while growing the company to 50 employees and almost $4 million in revenues.

If there were compelling reasons not to use the money for payroll--and there were--the CEO chose to overlook them. It's understandable. Every fast-growing business, no matter how successful, struggles with cash-flow problems. And every cash-flow problem can quickly grow into a life-threatening situation, overshadowing any other considerations. It's a simple yet relentless drill: You need to get more money coming in the door than is flowing out the door. To maintain that balance, you do what you have to do.

But cash flow is not only a management issue of whom to pay what and how much to pay when. It's also fraught with ethical implications--or it should be. Managing payroll, after all, also means making judgments about how other companies ought to be treated. Sure, you can slow down accounts payable, but aren't your suppliers as agonized about cash flow as you are? And while it may make for a sound management decision to spend money expanding operations--rather than pay vendors whose invoices are caked with dust--is it an honest way to deal with others?

Think of it another way: is that how you want to be treated when you're owed money? Of course not. But who has the time to spend fretting about right and wrong when what's at stake is a matter of life and death?

Not the CEO of the software company who found himself in this position one month in 1994. There simply wasn't enough cash coming in to meet the monthly tab. And that weighed heavily upon him. The $94,000 check provided what looked like an easy out--on the surface. But the order had come from a customer looking for a customized version of the company's software. It was a product, the CEO well knew, that his company couldn't possibly deliver.

Still, he didn't exactly relish the thought of not delivering on payroll. He had a good idea of how his employees would react should he actually miss a payroll. When the payroll service he used had once screwed up and delivered the checks so late that employees didn't get their money on time, half his programmers had freelance jobs lined up by the end of the weekend. Now he feared that if he told them they'd be missing a paycheck, within days there would be a mass exodus.

So what was he to do? He leaned on his top management team for advice. His chief financial officer, concerned about cash flow, wanted to cash the check. The vice-president of sales, whose compensation was tied to revenues, expressed a similar sentiment. But the vice-president of client services thought it was a bad idea to alienate a big customer. Not surprisingly, the CEO's top managers' responses reflected their own self-interest. But note what was absent: nobody talked about whether misleading the customer was the ethical thing, the right thing to do.

The CEO agonized long and hard, day and night, for four days. His solution? He took the check for $94,000, but he didn't cash it. He tucked it inside a folder. "When you're dealing with a large corporation like this," he rationalized, "at the top level they're really only talking concepts. It's not until you get into the field and deal with their people and what their expectations are that you really understand what they expect."

He decided to lie. He may have reasoned that by not cashing the check, it wasn't a real lie. He may have decided that by taking advantage of how long he knew it would take to spec out the project, he was merely buying himself some time to find a way to get other money in the door to cover the payroll coming up in 23 days. "I figured if I could string these guys along for just three or four weeks while I'm figuring out what they really want, that would at least give us a chance to cover ourselves," he says. He never asked whether it was right or wrong to deliberately mislead his prospective customer. For a CEO coping with a cash-flow crunch, it seemed like a sound management decision.

For the next three weeks the CEO and his key managers aggressively went after every receivable and slowed down every payable. They even began talking with the customer, painstakingly exploring what they'd be getting into with the $94,000 project. The CEO met with each of the large customers who owed his company money and explained that while what they owed might seem small to them, it could make a huge difference to him. "I expressed a sense of urgency without letting on how dire the situation really was," he says. By the end of the second week, it became clear that the efforts were paying off. The company had brought in enough money to cover payroll. "Exactly at the point where I knew we had managed through our cash-flow crisis and where we really knew what we were getting into," he says, "I went to the customer and returned the check, telling them that I couldn't fulfill that commitment." The CEO's decision to bluff the customer had worked.

So what's the big deal? Running a business means making compromises on a daily basis. While this CEO took a check for a job he knew he couldn't deliver, he reasoned that if he didn't cash the check, he wasn't really taking the money. And c'mon, his decision ultimately had no adverse effects on his company or its employees. Ethics, be damned. He's running a business, not a Sunday school.

Well, here's the issue: Listen to yourself the next time you start yapping about the customer that hasn't paid its bill for two months. Pay attention the next time you're griping over that vendor who signed on to do a job for you that he had no business doing but took because he needed the cash. Prick up your ears when you hear watercooler tales about the government's taking forever to pay a small-business customer. And then remind yourself that you are that small company being stiffed, misled, and strung out. Suddenly, the appropriateness of stepping back and asking yourself and your management team the tough ethical questions that go hand in hand with managing a less-than-virile cash flow comes clearly into focus.

The consequences of whether--and how--you address such questions can have broader implications than you realize. Ultimately, bad ethics lead to bad business practices' becoming acceptable behavior. "Our client was surprised when we returned the check," says the software-company CEO, "not because we didn't cash it but because they thought we'd keep the money and try to snake out of repaying it somehow. In the type of business we're in, there's a lot of maneuvering that goes on."

Jeffrey L. Seglin is an executive editor at Inc.

(The following readers' comments appeared in a subsequent issue of Inc.)

Bulletin Board
Readers' Debate: 'Does Your Word Mean Anything?'

January's Black and White column, "Always a Payroll to Meet" chronicled one CEO's predicament: facing a payroll he knew he wouldn't be able to meet, the CEO was relieved when a check for $94,000 showed up on his desk. That amount was sufficient to cover payroll, but a customer had sent it as payment for a customized-software order that the CEO knew his fast-growing company couldn't produce. Still, he needed the cash. What to do? Rather than leveling with the prospective customer, the CEO stalled by putting the uncashed check into a folder and proceeding to go through the motions of speccing out the project while he tried every method possible to speed up the collection of every bill owed to his company. The CEO succeeded, then returned the uncashed check. The column concluded with the observation: "Ultimately, bad ethics lead to bad business practices' becoming acceptable behavior." Readers disagreed not only over the right thing to do in such a cash-flow crunch but even about whether there was any ethical issue at all.

Roy Muller, president of BGB Inc., in South San Francisco, Calif., didn't see any ethical issue: "The whole concept that there are ethics involved in cash-flow decisions is ludicrous. It is a fact of life that with a small, fast-growing business without lines of credit or large capital backing, you have to make choices. The only ethics involved are that you don't try to snake out on anyone or hide from them. It is also a fact of business that every time we extend credit to someone, we are taking a risk that we won't get paid or will get paid late."

But Suzanne Du Molin, vice-president of Du Molin & Du Molin Inc., in Tiburon, Calif., found Muller's observation disheartening: "I really hate to hear anyone say there are no ethics involved in the question of paying on time. To me, it boils down to, Does your word mean anything? I've run up against clients who had Roy Muller's attitude...and I was careful not to extend credit to them again."

Steve Lawler, president of Ethos Consulting Inc., in St. Louis, felt that the CEO ought to learn something from the experience: "It wasn't clear whether this incident ushered in any kind of policy decision for future situations. Creating an ethical climate that is not simply reflexive requires thoughtful and reflective practice. The best news from this situation would come if after this happened, the company now had another piece of clear ethical modeling to add to its continued process of becoming a place with a certain culture. That would be the best return on the CEO's and managers' investment of time, stress, and fear."

Finally, Frank Navran, a senior consultant with the Ethics Resource Center, in Washington, D.C., reminded us that what's at stake reaches far beyond the individual ethics of any one CEO: "To rationalize that I cannot do anything about the state of business, because I am just a [fill in your position here] is ignorant, cowardly, and incorrect. The only way the state of business will become more ethical is through the commitment of individuals at all levels of organizations to the highest ethical standards: CEOs who refuse to play cash-flow games with other people's money, leaders who tell their key employees the truth, vendors who accurately communicate their capacities, and employees who understand that anything less than the ethical choice is unacceptable."