Podcast Ep 144 | Planning to win in 2023 - Cash - (5 of 5)

What cash deci­sions do you need to make to win in 2023? 

2023 looks to have major chal­lenges that are slow­ly devel­op­ing. And this is espe­cial­ly so when con­sid­er­ing your cash and how it might be impact­ed by the chang­ing envi­ron­ment. One of the most impor­tant ques­tions to answer to best pre­pare for 2023 is how can I main­tain con­sis­tent finan­cial per­for­mance if my cus­tomer’s needs or spend­ing changes?

Notable quotes from the episode.

“Prof­it is an opin­ion, but cash is a fact”

“How can you have and gen­er­ate more cash to grow and han­dle the bumps that might be in the road ahead?”

This week we dis­cuss how to main­tain con­sis­ten­cy if your cus­tomers are impact­ed and how can you win in 2023 through the cash lens.

EPISODE TRAN­SCRIPT

Please note that this episode was tran­scribed using an AI appli­ca­tion and may not be 100% gram­mat­i­cal­ly cor­rect – but it will still allow you to scan the episode for key content.

Brad Giles 00:13

Hi, and wel­come to the Episode 144. That’s a lot of episodes under the belt every week we’ve been doing this man.

Kevin Lawrence 00:20

I know it’s crazy.

Brad Giles 00:21

It’s crazy. What’s not crazy?

Kevin Lawrence 00:24

Was 144 If we did 12 Yeah, actu­al­ly, it’s not rel­e­vant. That’s not a rel­e­vant company.

Brad Giles 00:31

Tell me more about that man.

Kevin Lawrence 00:32

Yeah, it means noth­ing. Actu­al­ly just a ran­dom thought in my head. That’s fine.

Brad Giles 00:37

This is The Growth Whis­per­ers. I’m Brad Giles in Aus­tralia and the math genius. On the oth­er side is Kevin Lawrence in Cana­da, in Van­cou­ver on the West Coast. West is best. Yeah, 2023 a good year. Today we’re talk­ing about cash. Could be the most bor­ing episode. It could be the most impor­tant. The most impor­tant. Yes. So we always like to begin each episode with a word or phrase of the day Kev, what might be your word or phrase of the day?

Kevin Lawrence 01:11

Show me the mon­ey. Good old Jer­ry Maguire from that movie. I just love that movie. Both the quotes, you know, You com­plete me, him and Tom Cruise and Renee Zell­weger. But but the the phrase Show Me the Mon­ey the foot­ball play­er that he’s the agent for. And you know, at the end of the day, it’s busi­ness and you got to be able to show the mon­ey and some busi­ness­es show the mon­ey bet­ter. They pro­vide a bet­ter return math­e­mat­i­cal­ly, or they actu­al­ly gen­er­ate more cash. But if you’re build­ing a busi­ness, and it does­n’t gen­er­ate cash, that’s usu­al­ly not a lot of fun. Unless you’re a tech com­pa­ny grow­ing, but even now those busi­ness­es more than ever need to gen­er­ate cash or or close to gen­er­at­ing cash. So yeah, show me the money.

Brad Giles 02:01

Dis­ci­pline for myself just dis­ci­pline of the bor­ing basics. You know, reflect­ing back before Christ­mas, there was just a cou­ple of exam­ples that come to mind where some of the teams that I work with let a bit of dis­ci­pline slip, and they paid the price as a result. So it’s just dis­ci­pline, we must main­tain the dis­ci­pline. And it’s not always easy, but it is very important.

Kevin Lawrence 02:26

Yeah, the dis­ci­pline, I’ll keep show­ing the mon­ey keeps show­ing me the mon­ey. I almost feel like I should be break­ing out into song, but that’s not gonna happen.

Brad Giles 02:33

All right. Yeah. So we’re look­ing at 2023. And it’s inter­est­ing. Okay, we’re look­ing for­ward to look­ing for­ward to this year. And we’re real­ly get­ting a sense. There’s some pun­dits out there pun­dits out there who are say­ing, Look, we’re head­ing into a reces­sion, maybe there’s a 70% chance, we don’t know, okay, we’re not here to give you a per­spec­tive on that. But we are here to give you a per­spec­tive about what you need to do if some­thing hap­pens and how do you deal with that, specif­i­cal­ly in the lens of cash, this is weak. Because prof­itable busi­ness­es go bust all the time, okay. Prof­it is impor­tant and fine, but it’s the cash or the absence of cash that stops all the cogs turn­ing. And I love this quote that you’ve got in, in our notes, Kev, which is, prof­it is an opin­ion. But cash is a fact. It’s the only true thing in busi­ness. It is the you can

Kevin Lawrence 03:31

mess around with all the oth­er stuff, cre­ative account­ing, amor­tiz­ing things, pro­vid­ing for things, you know, accru­als, all kinds of things that you can do with prof­itabil­i­ty. But cash you just open up the account and see what’s there today. And, and I want to start us off with a sto­ry of an amaz­ing, fiery entre­pre­neur I worked with and I won’t even say the coun­try. And you know, I went and I did a ses­sion for his team on Rock­e­feller habits at the time back in the day. And you know, he was suc­cess­ful. He was a guy who worked on the fac­to­ry floor and then bought the busi­ness. And which was pret­ty impres­sive. Yeah, it was a dynam­ic guy. I loved him. Fiery, aggres­sive, good guy. And so, a few months lat­er, he calls me says, Kevin, we need to meet. I said, Okay, what’s going on? He goes, Well, I think I’m going bank­rupt. I go, What do you mean, he goes, I don’t have any cash left. I nor­mal­ly have six, sev­en $8 mil­lion in cash and I got none. And I’m like, Okay. And I said, Well, you know, I’m real­ly busy. And it was no, no, I need to meet you this week. I’m like, okay, because you told me this cash thing, and I don’t know what’s going on. It’s okay. I said, Well, I’m gonna be in Chica­go. Yep, I’ll be there. And you know, this guy had his own plane. Like he was doing okay. He was doing more than okay, but this way, he had a busi­ness that was cool. Close to 100 mil­lion of rev­enue and about 20 mil­lion a year of EBI­TA. So healthy, healthy busi­ness accord­ing to what his accoun­tant told us. So long sto­ry short, and he flies to Chica­go in his own plane. We go and stay in Trump, the Trump Hotel in Chica­go, which was spec­tac­u­lar. We both got mas­sive sweets, it was great. So we go to have. So that’s why the cash when the exact­ly, that’s what you would think. So we’re going to have our meet­ing and I dig in. And I said, so look, I said, Look, I have this cash analy­sis, please get your CFO to run the num­bers. And it’s from this HBR arti­cle. How fast can your com­pa­ny afford to grow? Yeah. And it’s got the cash con­ver­sion cycle in it as the base a few oth­er cal­cu­la­tions. And so he pulls up the stuff and I look at it kind of looks like garbage. This did­n’t make any sense. I said, Well, just this, let’s just tell me what’s going on here. Like, what hap­pened and we start pulling back and we’re, you know, we got we booked a day. I extend­ed my trip per day, so I could spend the day with him. Was­n’t maybe a morn­ing, I don’t remem­ber which might have been a morn­ing was the morn­ing. And we’re like 42 min­utes in and he goes and tells me the sto­ry. He goes, Kevin, I don’t know. I should have more cash. I go. Why? Just because I went to my num­ber one sup­pli­er, which is 50% of my costs. So 50 mil­lion a year I spend on the one sup­pli­er Yeah, you’re putting Brad’s putting his head down. For those of you that are on cam­era. Because Brad knows where it’s going. It is. And he goes, and I nego­ti­at­ed a 4% dis­count. I’m like, That’s awe­some. How’d you get it? All I had to do was Pam a lit­tle bit ear­li­er, I used to have 60 day pay­ment terms. Now I have 15 day pay­ment terms. So in case you haven’t got the sto­ry yet, if you spend $50 mil­lion a year on a raw mate­r­i­al, and you get a 4% dis­count, that’s 2.2 mil­lion a sav­ings, it should be it’s 2 mil­lion of the­o­ret­i­cal prof­it. But if you’re basi­cal­ly spend­ing $4 mil­lion a month on this thing, just over 4 mil­lion, and you pay in eight or nine weeks, and now you have to pay in two. That means that you have to come up with a lump of such a lump of cash that is equiv­a­lent to about six to $7 mil­lion. Remem­ber, the begin­ning of the sto­ry is he thought he had about six to sev­en, he used to have six to $8 mil­lion in cash and now we had zero. So long sto­ry short, I had to find a very nice way to not make him feel fool­ish because he just did­n’t he did­n’t know he did­n’t under­stand cash. I said, just say it and I found out took a breath I thought about I said here’s her in sim­ple math. You just pre paid six to $7 mil­lion to save the $2 mil­lion. And I mapped that out for him his jaw hit the floor. He’s like, Why did my CFO Tell me this? I said that’s the excel­lent ques­tion. That’s a real quick, why did­n’t your CFO tell you that you were going to crip­ple the com­pa­ny for cash, because of the beau­ti­ful dis­count that you got. So long sto­ry short, we worked through some stuff built out some oth­er strate­gies also talked about replac­ing his CFO. And then he was able to go and I believe he was able to undo the terms. But keep half of the dis­count. So he kept 2% dis­count, which was a mil­lion bucks a year, but then push the terms back to 60 days. And it took about three months every­thing washed out of the sys­tem. And he was fine again and actu­al­ly went on to build the busi­ness from 100 mil­lion in rev­enue to a bil­lion in rev­enue. And he did spec­tac­u­lar­ly well. But the point of it is, he did­n’t know, like a lot of exec­u­tives, he was chas­ing prof­it and destroyed cash with­out real­iz­ing what he had done.

Brad Giles 09:04

Yeah, that is awe­some. So 50 mil­lion divid­ed by 52 weeks mul­ti­plied by six weeks is how you get to just about 6,000,005.75 point 8 mil­lion. And yeah, that’s fine. But that’s the invest­ment to get that dis­count if you’re will­ing to put $6 mil­lion in to make an extra $2 mil­lion prof­it, which might make sense. If you need it, then that’s great.

Kevin Lawrence 09:26

But you’ve got 12 mil­lion in the bank. And you can give away six now and we’d have to do the return on cap­i­tal. $2 mil­lion a year on six. I’ll do that. That’s about a 30% return 33% Return on cap­i­tal. Yeah, I’ll do that deal all day every day. Yeah, if I have 12 mil­lion in the bank and I can kiss 6 mil­lion good­bye. Yeah. Or if I can bor­row it from the bank at 5% Back in the day or even now six or sev­en. But I’m get­ting 30% annu­al­ly. Absa free can lit­er­al­ly so that it actu­al­ly is a wise deci­sion only if you have extra cash in hand, or access to cheap cash because of the return on cap­i­tal A gen­er­ates. But still, it’s about know­ing and under­stand­ing these levers real­ly, real­ly well

Brad Giles 10:16

is so impor­tant before you make those big deci­sions to think about what’s the impact on cash. That’s such a good sto­ry, Kev, I’m so glad that we opened with that there’s a man­u­fac­tur­ing com­pa­ny that I work with and we we’ve been grow­ing, it’s been good, we’ve been grow­ing, it’s been going well. But the focus and under­stand­ing of gross mar­gin and its rela­tion­ship to work­ing cap­i­tal haven’t been as strong as they would I’d say that, in my expe­ri­ence for most entre­pre­neurs, as they say, you know, find­ing their feet work­ing cap­i­tal is one of the things that they under­stand the least, and yet is one of the most impor­tant things because that’s how they grow broke, right? And so that’s real­ly what we’re talk­ing about today is look­ing into 2023, as we look to the remain­der of this year, how can we win? How can we write? How can we improve our cash posi­tion, and maybe evolve our busi­ness mod­el, so that we can gen­er­ate cash in a more effec­tive man­ner, or just on it’s

Kevin Lawrence 11:25

kind of like play­ing with sharp knives, you kind of know what you’re doing before you start throw­ing them around? Cash is the core of a busi­ness, it’s every­thing. And most peo­ple have no clue and the amount of peo­ple that we’ve had the amount of CFOs that I from what I under­stand we I’ve tried to teach cash to they know the account­ing ver­sion of it, but not the busi­ness oper­a­tional ver­sion. It CFOs are a big a big lim­i­ta­tion in small to medi­um com­pa­nies, because either they don’t under­stand it that well, or they don’t know how to bring it to the exec­u­tive and a tool set that helps them make bet­ter choices.

Brad Giles 12:03

Yeah, you know, the good thing. The good thing about what we’re talk­ing about here actu­al­ly comes from Ernest Hem­ing­way, believe it or not, when he said that, how did

Kevin Lawrence 12:15

a great cash­flow the great writer have about cash? Is that correct?

Brad Giles 12:19

Calm the farm will explain. What he said is, how did I go bank­rupt? Slow­ly, slow­ly, slow­ly, then real­ly quick­ly. I told you it would come back to that, right. But that’s why that’s the point. If you’re grow­ing broke, if you’re see­ing and don’t under­stand cash, like it’s hap­pen­ing real­ly slow­ly, and you have the oppor­tu­ni­ty before every­thing unwinds real­ly quick­ly. So you have the oppor­tu­ni­ty to begin to work on this stuff. Great exam­ple was was your friend that flew to Chica­go, and sim­ply how you can under­stand the mech­a­nisms and then you can begin to unwind the things that are that are struc­tural­ly mak­ing this happen.

Kevin Lawrence 13:04

Yeah. And it’s it’s about under­stand­ing and aware­ness. And most peo­ple are under edu­cat­ed in this area. I had din­ner the oth­er night with a friend of mine entre­pre­neur who had sold his busi­ness recent­ly. And he’s a CPA. And that’s why CPAs are often very good entre­pre­neurs if they have that dri­ve, because they under­stand the busi­ness and the game. But we were talk­ing about this about his busi­ness. And he said, You know, when I final­ly fig­ured out fig­ured out, I need­ed to run my busi­ness through the bal­ance sheet, I need to look at it restruc­tured and squeezed the bal­ance sheet, and almost drove a whole bunch of deci­sions on the income state­ment and oth­er parts of the busi­ness, he said, but it was­n’t until I real­ly learned how to man­age the busi­ness through the bal­ance sheet. Think­ing about it through the bal­ance sheet that I real­ly became a real­ly good CEO and did a great job of build­ing the company.

Brad Giles 13:56

Yeah, that’s a, that’s a great way to put it and a good way to intro­duce this con­cept of com­pet­ing, or fight­ing for cap­i­tal. Yeah. So there’s a com­pa­ny that I’ve worked with here. And they were look­ing at open­ing a new office in an area, retail busi­ness, a store in a new area. And I they were kind of emo­tion­al­ly invest­ed, it was a bit of a lux­u­ry des­ti­na­tion, and they were going to head down there. And I said to them, okay, so what are the oth­er options? If you’re going to, let’s say, spend $2 mil­lion dol­lars to open up that store­front? What are the oth­er options that are avail­able? And they had­n’t even thought about it? And it’s like, well, how do we, we need to devel­op an envi­ron­ment where we get the cap­i­tal to com­pete for oth­er or against oth­er ideas for the best out­come. And so we intro­duced that idea, and then they decid­ed, okay, that won’t pro­duce a great out­come. Like it may look good and it may feel good, but num­ber one, there’s no star They’re like very, very hard to get staff, the cus­tomers were going into an area where there’s real­ly strong com­pe­ti­tion, so we could­n’t guar­an­tee it. So using this, the cri­te­ria that we use there, we actu­al­ly opened an office in a bet­ter area, or a store in a bet­ter area. And it’s, it’s not per­form­ing awe­some. But it’s get­ting com­pound­ing improve­ments over time. It’s the same with any of the cash deci­sions that we’re mak­ing. We want to think about what is the cap­i­tal that we need to invest, and what’s five oth­er ideas that we could use to help us live our pur­pose stick with­in our hedge­hog, what­ev­er it is, if we’re mak­ing investments.

Kevin Lawrence 15:37

Yeah, and actu­al­ly insane. Anoth­er CEO that I’m work­ing with is doing this just now. And they’re going to have the team do like a Drag­on’s Den style thing, where they all make their pitch­es for how they want to see cap­i­tal invest­ed. And then they’re giv­ing para­me­ters of about sev­en dif­fer­ent vari­ables that they also need to make their case based on. Yeah, prof­itabil­i­ty, Cash Gen­er­a­tion risk. Oth­er resources required return on invest­ed cap­i­tal, they have a bunch of vari­ables to look at. So it extract some real­ly good ideas. But more than that, it trains peo­ple that let the best idea win. And it’s not just cash, but you got to take into, it’s not just gen­er­at­ing cash, but that’s one of the key things to do it. It’s inter­est­ing, we had a Strat plan­ning meet­ing for a client recent­ly the oth­er day. And when we’re doing the plan­ning meet­ing, one of the execs says, look, and the busi­ness is a lit­tle bit tight on cash, because they’re grow­ing quick­ly, and they have lots of things are invest­ing in. And one of the one of the call it like a like it’s like, not called the pres­i­dent, it’s like a pres­i­dent of a divi­sion said, hey, you know, if you give me $3 mil­lion more cash, I can pro­duce notice­ably more prof­it. And I’m like, Okay, show me the mon­ey. Show me and so we spent a total of 180 sec­onds. And in my mind, I’d like okay, good, done deal. So what he explained, and I know already know, and trust his judg­ment. So this is not a stranger. I know the guy. I trust them. He’s a CPA as well. So he’s, you know, any knows his num­bers, and he knows the busi­ness is look, if you if you give me $3 mil­lion in the first year, I’ll pro­duce, you know, at least $2 mil­lion of addi­tion­al prof­it with that $3 mil­lion of cap­i­tal. And I said, Okay, and what about your five $3 mil­lion, your 10 min­i­mum $3 mil­lion of prop­er­ty, we just say we did­n’t say, we can give you $3 mil­lion? Today, you’ll give us at least two in 2023. And every year there­after, 3 mil­lion on 3 mil­lion. I go. Yep. i Oh, good. What oth­er ideas you got? Let’s keep going. That’s a that’s 100% Return on cap­i­tal annu­al­ly. That’s it like those are as good as ideas get? You get 3 mil­lion on your 3 mil­lion. Okay. That’s great. Yeah, that’s, that’s the kind of that those are hit­ting it out of the park. And again, con­text ID here. We already know the guy trust the guy, all this oth­er stuff. But he had the answers. And it was an easy point of now. It’s not my deci­sion. It’s the CEOs deci­sion. And he was also agree­ing. You got you got to rank a lot of oth­er real­ly good ideas, you got to have a lot of you got­ta have a spec­tac­u­lar idea with shoot­ing fish in a bar­rel. prob­a­bil­i­ty of suc­cess, you know, to Trump that idea for him not to get the capital.

Brad Giles 18:40

Yeah, I got a slight­ly dif­fer­ent sto­ry to that. I walk into a busi­ness, got to know these guys for a while walk into a busi­ness. And last year, and they said, Alright, so we’re cur­rent­ly at nine or $10 mil­lion in rev­enue per annum. Okay. And so our goal is to get to 50 mil­lion in three years. Okay, that’s a that’s a good goal. Yep. And so, you may be inter­est­ed in what my gut says, when I, when I hear that, and then I look out the win­dow at the, you know, the $3 mil­lion worth of stock that’s in your ware­house. How are you going to fund that growth? Like, that’s just intu­ition, because, you know, how much mon­ey are you pre­pared to spend to achieve that $50 mil­lion, because it’s not going to, you know, your busi­ness mod­el does not suck cash, or sor­ry, does not spin off cash, it sucks cash, cash, right, so every dol­lar that you sell, and this is so impor­tant to the cash con­ver­sa­tion, every dol­lar that you sell above your $10 mil­lion dol­lar amount, there’s a cer­tain amount of sense that you need to invest to make that dol­lar of sale. And so we kind of did a quick and dirty analy­sis of that, but it’s so impor­tant to under­stand what is your, what is the work­ing cap­i­tal require­ment if you’re going to grow the busi­ness in 23? Yes. And then the sec­ond part is what can you do about it come back to this, the four and watch? Well, one of the parts is the cash con­ver­sion cycle, right? The four com­po­nents, which is yeah, the sales cycle. So that is from the time when we say hel­lo, my name is Brad, improve

Kevin Lawrence 20:25

the sales cycle? Yep. Spend $1. Yep, yep.

Brad Giles 20:29

To the time when you get an order. And then the next part is the make and pro­duc­tion cycle where we’re mak­ing the goods. The third is the deliv­ery cycle. How many days does that take? And then there’s the account­ing or billing cycle. So all up from the time when you first meet a prospect until the time you’ve got the cash in the bank across those four cycles? It could be, I don’t know, it could be 40 days, 100 days, 150. We don’t know.

Kevin Lawrence 20:58

But or minus 27.

Brad Giles 21:02

Oh, that’d be Michael Dell, would­n’t it?

Kevin Lawrence 21:05

minus 42 is what Dell Dell went bank­rupt. Dell learned some lessons about cash in their life­cy­cle. And they almost went bank­rupt. And they found a mas­sive inno­va­tion, which today is nor­mal for us. But they took their cash con­ver­sion cycle from I think it was about 60 days in that neigh­bor­hood. And they got it down to minus 42 days, that six weeks, because of a few major things just in time inven­to­ry. And I did a tour of the Dell facil­i­ties prob­a­bly 15 years ago. And at that time, there, were still build­ing a lot of desk­tops. And there was about four hours of inven­to­ry in the build­ing at any giv­en time hours. So on top of that, they they got cred­it card pay­ments, so cus­tomers paid before when the com­put­er was ordered, and they would take a bit of time to ship it. And so based on the terms and nego­ti­at­ed with the sup­pli­ers get­ting paid up front, which was a mas­sive inno­va­tion back in the day, now they got down to minus 42 days. And it was spec­tac­u­lar. And the thing about minus 42 days is you can grow as fast as you want. Yeah, because the busi­ness gen­er­ates infi­nite cash, as long as it’s prof­it, as long as it’s prof­itable, and you have good mar­gins. On the oth­er end of it. Some­times if you have 150 Day Cash Con­ver­sion Cycle, your busi­ness may only be able to grow 7% per year with­out exter­nal cap­i­tal. If you have a sev­en day cash sev­en, instead of cash, a cash con­ver­sion cycle, your busi­ness can prob­a­bly grow infi­nite at 45 days. Again, depend­ing on the mod­el and your inven­to­ry all these oth­er vari­ables. The point of it is, the more you improve your cycle, the faster you can grow with­out exter­nal cap­i­tal, and most busi­ness­es should gen­er­ate cash as they grow. But the ones that need exter­nal cash. Nor­mal­ly, it’s because they have a real­ly long cash con­ver­sion cycle. And you know, they have high enough mar­gins and etc, it might be worth it. But learn­ing how to tweak the mod­el like Dell did, or lots of oth­er exam­ples that we can share can notably improve the cash required to run your busi­ness. That is, that gives you infi­nite­ly bet­ter returns because you have less invest­ed cap­i­tal. Even if you had the same prof­it, you have less invest­ed cap­i­tal. So your return on invest­ed cap­i­tal, which is I think my every­thing I under­stand is the num­ber one num­ber in busi­ness. It’s the num­ber one num­ber to know how good the CEO is. Less cash, same prof­it means a bet­ter return.

Brad Giles 23:52

I think what’s real­ly impor­tant is that for those who may not be too famil­iar with cash, very specif­i­cal­ly, what you’re talk­ing about here is the cash con­ver­sion cycle days, not accounts receiv­able days. So this is not how long does it take your cus­tomers to pay? Although that’s one small com­po­nent of it. This is from the very begin­ning of a sale, when it’s the very very begin­ning when we start to inter­act with the cus­tomer right through until we’ve got their mon­ey in the bank. How many days does that take? And then how can we reduce that using what­ev­er means possible?

Kevin Lawrence 24:27

Every time does it take for the whole mon­ey wheel to spin and the major fac­tor in all of this. The biggest thing that we see in com­pa­nies that are inven­to­ry based is that they it’s easy to build up inven­to­ry that your cus­tomers are always hap­py. It’s easy. Okay, inven­to­ry is a dan­ger­ous thing and even some­times it takes com­pa­nies a month to get an invoice out. Well, a month to get an invoice. So let’s just say you’re a you know, 100 100 mil­lion dol­lar busi­ness 100 mil­lion in rev­enue Yep, if it takes you a month to get an invoice out, that means if and if it did­n’t have to be that long, that is 8.8 $8.3 mil­lion of cash, just required to fund the month that it takes to get the invoic­es out the door. If you invoiced in one day, and assum­ing your col­lec­tions were based on when you invoiced, you would need 8.3 mil­lion less cash to oper­ate your busi­ness or there would be $8.3 mil­lion more cash in your bank. And you know, I got an exam­ple of a prob­a­bly hun­dreds of mil­lions of dol­lars we’ve been able to put back into their cur­rent accounts from com­pa­nies I work with I had one, it was a trav­el agency. And we call this we had this theme that we did to improve cash called route 66. Yeah, their aver­age time their cus­tomers paid from from from trans­ac­tion date until mon­ey in the bank was over 90 days, we want­ed to dri­ve that part of the cash con­ver­sion cycle down to under 66. Tru­ly we want­ed 60. But route 66 was mem­o­rable, and there’s a song and a road. So we did this whole thing. And we got the whole orga­ni­za­tion obsessed about this from the invoic­ing clerks, right through to the peo­ple col­lect­ing it and the cus­tomer ser­vice agents and talk to peo­ple and in a month, we were able to pull pull the cash cycle, that part of the cash cycle from over 90 to under 66. I think we hit 59 point some­thing days, which was spec­tac­u­lar. And again, that put one month sales back in the bank. So if they were doing 30 mil­lion a year, that meant two and a half mil­lion dol­lars went into the bank, the bank went up by two and a half mil­lion dollars.

Brad Giles 26:51

And why do you need that? It’s not it’s not to go and invest in oth­er ven­tures, it’s so that your busi­ness is stronger. So that so that imag­ine if you were going to you’re look­ing at to the stock mar­ket, and you’re going to invest in a com­pa­ny and you look through their finan­cials and you saw, Oh, they’ve got three weeks of cash reserves. So that means that if some­thing stops, basi­cal­ly all of the wheels stop after three weeks, they’ve got no mon­ey to pay, you would nev­er ever invest in that com­pa­ny. And the prob­lem is, is that most small and medi­um busi­ness­es oper­ate with­in that that range. Yes, list­ed com­pa­nies would be a year or more worth of cash, if not to I remem­ber Mike, Microsoft, Microsoft, excuse me, Bill Gates, always insist­ed through all years, they would nev­er have less than one year’s worth of cash reserves, because he knew that’s the thing that unwound busi­ness­es all the time. So look­ing at 2023, real­ly were say­ing con­sid­er your cash con­ver­sion cycle days, con­sid­ered some of the oth­er areas of cash. But then the oth­er part of it is how much cash reserves do you have. And then, first­ly, to wish to weath­er the poten­tial storm that is 2023. But to improve that posi­tion, there’s no end of peo­ple who want to come in and sell your stuff, there is a per­son who wants to come in and show you their prop­er­ty invest­ments, or their you know, invest­ment in their com­pa­ny or what­ev­er, what­ev­er it is, but the best invest­ment is a stronger, more resilient cash reserve in your busi­ness. Yep.

Kevin Lawrence 28:33

So there’s lots of oth­er exam­ples on what’s your one thing one just thought on this is that the return on invest­ed cap­i­tal is a crit­i­cal num­ber to pay atten­tion to. So when com­pa­nies that we get smarter with cash, we look at cash con­ver­sion days, so we use less cap­i­tal run­ning the busi­ness. Sec­ond thing we do is we start to track return on invest­ed cap­i­tal for all of our invest­ments, and the com­pa­ny over­all. So we can start to see where our cash works hard for us. And where our cash is under­uti­lized. Go back to show me the mon­ey, like I said at the begin­ning of the show, is one of the com­pa­nies I’ve worked with. We’ve been work­ing so hard for three, four years. And I’m telling you, we are mak­ing bet­ter deci­sions by the day, more by the quar­ter by the month by the week because we’re look­ing at both prof­itabil­i­ty and return on invest­ed cap­i­tal. So we’re run­ning a more effi­cient busi­ness on a reg­u­lar basis. And we made some deci­sions that have sur­prised us. It’s yeah, last lot last. What will last exam­ple I would like to share on this though is that, you know, the thing to help with cash a lot of the times is bet­ter data to under­stand it. And peo­ple pay­ing atten­tion to run­ning the process­es bet­ter. Like real­ly run­ning the process­es bet­ter, and not get­ting loose on things that real­ly mat­ter. And you know, one of my clients when­ev­er the econ­o­my turns and they’re like been through a lot of turns over the years. You know, when it comes to a tight econ­o­my, they auto­mat­i­cal­ly get tighter on cred­it. Like they put tighter cred­it terms and don’t give cred­it to just every­one. So they don’t get stuck with sales that haven’t got paid. As you said, it’s it’s only counts as a sale when the mon­ey comes into bank, not when a sales­per­son signs a con­tract. Sec­ond thing is, is that they nor­mal­ly hire more peo­ple, on the cred­it end of it for the col­lec­tions of the receiv­ables. Col­lec­tions is labor and a lot of work. And so in the mar­ket, we com­ing out of peo­ple would put extra resources into HR for hir­ing and recruit­ing. In his case, he would always then start to move those resources to the col­lec­tions team. So that they were the one get­ting paid. There’s an old say­ing the squeaky wheel gets the grease, mak­ing sure they’re get­ting paid by their cus­tomers. And it’s not because they haven’t been fol­low­ing up and com­mu­ni­cat­ing well with those people.

Brad Giles 30:56

Who on your lead­er­ship team owns cash, CFO, accoun­tant, who­ev­er it is maybe and how strong are they at defend­ing the cash? Yes, require­ments. Because if you’re in a lead­er­ship team meet­ing, for exam­ple, in exec meet­ing, and some­one comes up with a new hare­brained scheme, and it’s going to cost amount of mon­ey or it’s going to affect the CCC days or what­ev­er it is, who is fight­ing the good fight from the cash front. Because that is, look, it’s every­body’s job. But most­ly we want the accoun­tant, the finan­cial con­troller to be the CFO to be the one that say­ing, Hold on a sec­ond. If we do that, that is going to have this ram­i­fi­ca­tion a on prof­it, but more­over, on cash, like, great idea, how do you pull in to fund that? How do you plan to exe­cute that with­out destroy­ing our cash reserves? Some­one needs to be argu­ing that point regularly

Kevin Lawrence 31:54

and edu­cat­ing the team on how that works. Oh, yeah, of course, because peo­ple just don’t know. It’s, it’s awe­some. Yeah, awe­some. cash, cash, cash, show me the mon­ey, the whole idea. And every­thing we’re talk­ing about is get bet­ter at gen­er­at­ing cash, get bet­ter at a vault val­u­at­ing things that either gen­er­ate or con­sume cash. So you can build up the war chest, the bal­ance sheet, what­ev­er it is, so that you can be ready to han­dle any kind of storm that comes up. And we know we’re prob­a­bly going into a storm. But just how do you have more cash in cash allows you to stick to your val­ues and stick to your strat­e­gy and take care of your cus­tomers it gives you cash allows you to be able to fight the next bat­tle and not get tak­en out by the one that you’re in.

Brad Giles 32:37

Very good. Very good.

Kevin Lawrence 32:39

Awe­some. So thanks for lis­ten­ing every­one. This has been the growth whis­pers with Brad Giles up down how­ev­er you want to look at it in Perth, Aus­tralia. And I’m Kevin Lawrence and bang is it up? It’s upside down up. It’s right. Kevin Lawrence up in Van­cou­ver, British Colum­bia, Cana­da. To sub­scribe to the pod­cast just go to wher­ev­er you’re lis­ten­ing. Click sub­scribe, hap­py for you to give it a rat­ing. Rec­om­mend it, take an episode, share it with some­one you know that might find it valu­able. For the video ver­sion, go to youtube​.com and search the growth whis­pers and Brad and I both put a lot of ener­gy into shar­ing what we know because we believe in abun­dance and we’d like to share. We’re very for­tu­nate to learn lots from the won­der­ful com­pa­nies we work with. So Brad’s newslet­ter comes out week­ly. Lots of ideas and insights to share. That’s at evo​lu​tion​part​ners​.com​.au and mine you can find at Lawrence​and​co​.com. Again, both of us week­ly newslet­ters, lots of resources and here to help. Have a great week. Show me the mon­ey. Think Jer­ry Maguire help­ing us to run our busi­ness­es bet­ter. All right, have a good one.