Cash In The Valleys Of Death By David Chavez

If you’re a business owner or a member of a leadership team, you are responsible for the company’s cash. If the business is growing, a time arrives where the next stage of its life cycle change is going to happen. It doesn’t matter whether you and your leadership team is ready, you’re entering the Valley of Death.

This “Valley of Death” is described in the book, Scaling Up, by Verne Harnish. “It’s a place in the company’s growth where you’re bigger, but not quite big enough to have the next level of talent and systems to scale the venture.” In the “Valley of Death” the company needs cash to make it to the next level. If you’re in the first valley and sufficient cash isn’t available you will most likely be pushed back to become one of the 96 percent—mice that roam the earth with sales volume below $1 million. If you’re in the second, third or fourth valley, it could be your time to die. No one wants to die.

So how does a company get the cash it needs to move through the valleys to end up on next plateau? There are the traditional three F’s (Family, Friends & Fools), angel funding and bank funding to help. If the company is larger, then venture capital, mezzanine capital, and private equity groups can supply the cash too. However, all of these methods cost you cash, cash from the equity you give up or cash from the interest you’ll pay. It’s the cash you’re trying to preserve to get through the next valley.

For example, let me share something from a former client, a technology company. They were strapped for cash and became weary from years with no growth and poor cash flow. After working hard for a year to focus the company to grow the right way, the CEO found the company flush with cash.

So what did he do? He gave huge bonuses to his team who wanted the cash.

I am not opposed to bonuses for great behavior and meeting your targets but huge bonuses just because you have the cash is no reason to hurt your company. After paying out most of his free cash flow through bonuses, the CEO stood in front of his executive team three months later, frustrated because they again had no cash. A year later, some of the executives who pushed for the bonuses lost their jobs because the company had too little cash. All the leaders wasted cash.

Consider another company. The management team starts the budget process where the CEO wants 50 percent growth in the business. They have no real plan but they develop budgets on fantasy numbers. The leadership team has little true understanding of who their customers are or, how they will attract their customers to their product offerings. Even if they get a customer lead, they don’t know how to nurture it to create or sustain the 50 percent targeted growth. Everyone loves the work they’ve done even if they have no facts to support their bloated budgets. The CEO loves the budgets because they wanted 50 percent growth even if his team was telling him it’s not possible. The leaders start executing the budget by hiring all kinds of people and committing to all kinds of long term spending. Three or four months later, they wake up in cash hell needing to cut over $2 million in cost quickly. They wasted cash.

I’ve learned that the biggest cause of wasted cash are small incremental changes creeping into a company. The copier works fine it doesn’t break down and it’s not slow, but for just $200 more a month the company can have a new copier. Some people don’t like the old copier and want a new one besides the salesman is cute. No one does a cost analysis to see what the real savings would be. There were none and $7,200 ran out the door over the next three years of the contract. They wasted cash.

Another great example is job creep. Five years ago one of the accountants, who was directed by the Controller, to prepare a widget analysis every month. The accountant does what they’re told and prepares the widget analysis. For the next three months, the Controller is very interested in the analysis because they need it for a project the CFO was working on. The Controller never tells the person to stop doing the analysis that is taking eight hours a month to complete. If the accountant is paid $45,000 a year and spent 5% of their time preparing this analysis for 57 months when there was no need. It cost the company around $13,000. They wasted cash.

The key to being successful in managing your cash through the “Valley of Death” is to manage your cash all the time. Having good policies where people know what is really driving good cash management and having everyone in the company own it. If you’re a leader, resist the urge to take all the cash home. If you’re like most people you want your family to do well, the urge is strong! Be disciplined. In profitable times, preserve the cash for your next “Valley of Death.” If you do the valleys could be more shallow and easier to navigate through.

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