Episode 381: Cash Is King with Peter Kingma

Welcome to another episode of the Above the Business podcast. My name is Bradley Hamner, your host.

Well, have you ever heard of the saying cash is king?

You may have even have heard revenue is vanity, profit is sanity, cash is king. Well, our next guest on today's episode, Peter Kingma, has a book all about cash. I love this episode. I think we dive into a lot of different aspects about managing cash. In the business, and he comes at it from certainly much bigger businesses than what we all have, or most of us have anyway. And I think that there are times where whenever you're hearing from someone who works in corporate America, as an example, that it's a far departure than what we are all in, which is in small business. That said though, if we do look at some of those bigger businesses, we can find some elements or principles that that can help us to be able to manage the cash in our business even better. Without further ado, here's my conversation with Peter Kingma.

Peter Kingma, welcome to the Above the Business podcast.

Thank you. Good to be here.

Excited to have you. Well, we always start with background and origin story. I think it's interesting to kind of hear how people got to where they are. So why don't you take us back wherever you feel is appropriate and bring us to present day?

Yeah, no, glad I'm coming to you from Chicago, based in Chicago. I, gosh, I got my career started off way back when at a big company called IBM and then ended up in consulting and now at Ernst Young leading the working capital practice in the Americas. So while I know we're going to have a conversation that's going to focus on topics for small businesses, my, my background or my focus is really on very big businesses. And what I'd love to share is, uh, what I've learned from them, um, both good and bad, and how to either capitalize on that or avoid some of the mistakes that very big businesses make.

Yeah, I, you know, I think that there are principles that apply whether it's a small business, a medium-sized business, or even a really big business. So I have to tell you, uh, I didn't say this before the recording, I had a moment early in my career— I think I've shared elements of this on the podcast— that I— well, let me even go back. I got my degree from Auburn University in finance, and what I'm about to say is not an indictment on my university, okay? This is all on me for sure. But I did not have an understanding of the difference between profit and cash, and I think a lot of business owners struggle with that too. Uh, even with the clients that I work with, they say, well, wait a minute, where, what, where, why is that different? Or I don't understand how that could be different. And so your book Cash Is King obviously speaks to that very big difference. Can you just speak to like what was the genesis inside of you about coming up with this book Cash Is King? And what does that specifically mean?

Well, let me tell you, you can feel very good about your Auburn education because I would say you're in good company. In fact, I would even suffice to say that most executives of even very big companies, companies that we all would recognize the names, my clients, a lot of them struggle with that concept as well. And probably what I think we do a really good job in business explaining revenue and even within big enterprises explaining your role in generating, say, are generating revenue, and we do a pretty good job of explaining profitability, right? So cost containment, that sort of thing. We do a lousy business explaining liquidity and cash. And so to your point, you can have revenue, you can pay taxes on your revenue, and you cannot have cash in hand, right? So cash is the lifeblood of a company. You can be a profitable business and still go bankrupt. If you don't have the cash to pay your employees, to buy equipment, to expand, or even weather a storm when something bad happens. So, that's why I wanted to write this book. I've spent 20+ years working in this field, again, working with some very big organizations, helping them solve very complicated problems. And I thought a light bulb kind of went off thinking, I bet these principles would be useful to small business owners as well, entrepreneurs. And so that's why I set out to write Cash Is King to kind of explore some of these basic concepts of what I think is such an important part of the business equation. I would say it's probably the third leg of the stool of revenue profitability, and I would say cash is the third leg.

Yeah.

Yeah.

You know, you're, we talked about this before we hit record, but I've heard for a while, but I never really understood it. Again, it was one of those things where you hear it, but you don't actually really understand the level of it. Revenue is vanity, profit is sanity, and cash is king, right? And so, um, is that true? Is that true in big business as well as big, uh, small businesses as well? I mean, does that mantra hold that quip, that maxim hold true regardless of the businesses?

I mean, I think all of it is important, right? You know, obviously revenue is very important. It's important to grow a business. Profitability is very important. You know, it's important to grow a profitable business. But the cash bit, and I think the reason we, you know, we kind of emphasize cash is king is because it so often gets forgotten and the importance of it gets forgotten. Most people go into business and start businesses because they're passionate about whatever it is, making the product or the service they're providing. And most people don't go into business excited about back office functions, but it's those back office functions that have the impact on your ability to generate cash. And again, as I said, that cash is what fuels a business. That's what enables you to grow and what is your insurance whenever there's a storm. So yeah, I do think cash is king because I think it's often forgotten and I think we really need to pay attention to it like we do revenue and profitability.

We, over the years, we've had the podcast about 4.5 years or so. At different times and in different angles, culture has gotten mentioned a lot, um, and rightfully so, rightfully so.

So is—

so has leadership. And we attempt to look at business and entrepreneurship as like a prism, and I'm going to come at it from every single angle, but you have one that I'm really curious about we've never ever talked about. A cash culture versus a profit and loss culture. Explain to us what you mean by that.

Yeah, it's, it's making decisions using the impact to cash as one of the criteria. So let's go back to sales, for example. We love chasing sales and we get very excited. We get a big deal comes in, big order, and then the final stages of negotiation The customer then says to us, and oh, by the way, I want to pay you in 90 days, or I want to, I want certain commercial arrangements on the contract. I want certain ups, you know, maybe it's certain service level commitments. You know, if I place the order, I want it delivered within 1 week. Those decisions may be really great, good business decisions to make, but you need to bake that into the total cost to serve. Floating a customer, say 90 days versus maybe 30 days, that's 60 extra days that you are giving them to pay you. So you've kind of become a bank. And in many cases, you're probably a bank that doesn't charge interest because you've given that 60 days of your cash for free. Imagine if you went to try and get a line of credit and you said, I need a line of credit for 90 days, but I'm not going to pay any interest on it. You get laughed out of the bank. So a catch culture is one in which we bake those kind of impacts and decisions into the overall process and we understand the impact. Let me give you another example. You know, oftentimes in procurement, we will try and find the cheapest cost of material, right? And so maybe that comes from Asia and that now comes with a longer lead time requirement, you know, so instead of 2 weeks, now it's a month. Well, that can cause problems if I don't have good visibility into my forecast a month out in this example. So now maybe I have to buy more than I might need, or maybe they even require me to buy more. They have a, a greater minimum order quantity requirement. That's going to impact how much cash I'm tying up in inventory. And so it's giving your teams the tools and the insight to be able to make those trade-off decisions. Of how it's going to impact the balance sheet, how it's going to impact cash flow. That's what a cash culture really is.

You know, one of the, um, there's a big push recently. I'm sure some of the companies you may deal with are in software, but I don't think it necessarily has to be in software. It, it, the point is, is I'm getting to recurring revenue, and they really want to stack recurring revenue businesses. They're very valuable, they have higher multiples, etc., because are more easily able to, uh, predict, predict. However, I think cash is a big thing with those companies because their cost to acquire a customer, their CAC, is very much upfront, but they're only getting, let's say, $97 a month. And so if they can keep this person for 3, 4, 5 months, then sure, they're going to end up becoming profitable. But that's where an example— it may be a couple thousand dollars that it takes them to be able to acquire a customer, but they're only going to get it at $97 a month. Is, is that a, a fairly good example of some of the issues that you've seen with businesses that may struggle with a cash flow issue even if they're growing?

Absolutely. So let me, let me talk about a concept called the cash conversion cycle. And this could apply to software firms where they have to then outlay expense or cost to acquire customers. It could apply to a manufacturing company. You got to go out and buy material, you got to make stuff, then you've got inventory, you got to try and sell that inventory at some point, and then you got to try and collect for that. So the cash conversion cycle is the amount of time it takes from when you make expenditures to recouping that back through profitable sales in cash in hand, not just the revenue. So it's like golf, the shorter the score, the lower the score, the better. So you want a cash conversion cycle to run very fast, right? So the kind of the holy grail is if you could get people to pay you cash upfront before you had to outlay anything, that would be great. And we see that in some industries, right? Some businesses are set up that way. Furniture, you'd be hard pressed to be able to go in and buy a sofa without having to pay some kind of down payment on the sofa before they ever deliver it to you. And then they finally deliver it to you. So some businesses are already set up to have that kind of model, particularly ones that are very capital intense. But yeah, you're absolutely right that keeping track of that timing between when you have to make an outlay of precious cash and when you get back in is very important to your overall health.

Yeah, um, there's, there's a business that I, I know fairly well and work really closely with them. They're, uh, in exterior remodeling. Their average value is maybe around $40,000 per customer, something like that. So they're roughly going to do, you know, 150 to 200 deals in a year, something like that. But to your point, one of the things that they, um, struggle with, and is it maybe— I think I've heard this called a negative cash flow cycle— is that they do a lot of the work, they do collect some of the money up front, about half, but then the other half is due once it's completed. Well, in some cases that completion gets drug out because there's, well, this is not done and this is not done and we're not happy with this, and before you know it they have become a bank for 30 or 60 days. And so they're bumping up against cash flow issues, yet they're very profitable, 40, 45% gross profit, at least on the deals that they're doing. And so that's one of the closer examples I've had of a negative cash flow cycle. And I think you mentioned one that is a positive cash flow cycle, is that they're collecting all the money up front, before they're actually even delivering the goods.

Is that fair?

That's fair. Yeah. You know, construction is famous— famously a kind of a Rob Peter to pay Paul environment, right? You collect the money on one job, then you have to outlay it on another job, and you try and hurry up and collect the rest of that on that job.

Sure.

So, so, you know, one thing I, I advise, um, small business owners to do is to evaluate where you are in the power continuum. Whether it's with your customers or with the suppliers that you're buying from. And, you know, if you're a guppy, if you're selling, let's say you're selling into a big box retailer, you're probably not going to get much of a chance to negotiate commercial terms. It's going to be kind of take it or leave it. Or if you're in construction and you're doing, you know, for a big project, or you may, you know, or those are the prevailing commercial terms that, you know, you the market is conditioned to only paying a certain percent upfront, then that's the sort of commercial arrangement that you're going to have to live with. So what you want to do is make sure that you control all the things, or you pay attention to all the things that you can possibly control. So like in construction, oftentimes there's milestone billing, right? So you bill upon different points of completion. You want to be really on top of that and be darn sure that you're getting those milestone billings out exactly on time. And if there's any kind of supporting documentation, or if you're aware of a quality issue or something that would cause the customer to create a dispute and dispute paying that, you want to try and solve those, you know, sort of ahead of the curve because, you know, all of those extra days are within your control. Perhaps, even though the commercial arrangement, like the 90 days that I was giving out, may not be in your control. Again, it's this stuff that, you know, sadly, it's the stuff that's not very fun to do, but it's really not very hard to do. It's just not— we don't go into business because this is what we want to do, but it's really, really important. And one thing I also say is that your ability to manage these processes says an awful lot about your overall health, not just the amount of cash you're generating, but it points to potential process failures you have, which can also drive up cost, can drive up customer, you know, customer service level issues, you know, quality issues and the like. So staying on top of those kind of basic processes around billing, collections, the way you procure, the way you pay, are vitally important.

I, I did have a— I had a conversation last week with a client that's doing— I mean, to the point of revenue vanity, they're doing just a little south of $3 million in, in top-line revenue. They haven't been in business very long. I think for a lot of small businesses, if they were doing $3 billion in top-line revenue after 3.5, 4 years, You know, that looks really good. And after doing some quick calculations, their profitability— not even cash, we didn't even get to that— just their profitability, they were running at 3.5 to 4% margins. And so I said, listen, we don't need to be focused on growing this company. We need to be focused on making you more profitable first and foremost, and then we can start to begin to consider what growth actually looks like. But let's say— and he admitted as much, Peter— that cash was really tight. Now, cash is going to be tight whenever you're operating on those type of margins, but to our point earlier, if he's at 3 to 4%, his cash is, isn't— is, is probably going to be even tighter than that. What do you recommend a business owner And I'm just using that one as a hypothetical example, but it's actually a real example of steps someone begins to take to start the process of actually paying attention to cash so that they can actually have more cash to deploy, whether that's in growth, facilities, equipment, distributions to owners, even, etc.

Well, I'm going to be a shameless promoter and say buy my book is the first in that because I do lay that all out in each chapter. I kind of break all those elements down. So the order to cash process, you know, that's the getting the bills out the door and collecting. The procure to pay process is how you manage your overall procurement cycle and make decisions like, should I consolidate my spend to get better negotiating or should I spread it out because I've got too much risk? For example, I've got a chapter on logistics, chapter on production. And then I do a chapter on businesses that are not production-oriented, so other services business. And let me get to your question, but let me really fast say at the outset here, lest anyone's concerned, my book is not a textbook. There are no graphs or charts. I created a fictitious company where the characters in each chapter are trying to solve problems. There's an audio version of it so you can listen to audio so you don't have to worry about lots of hard calculations to go through. But I think what I would say to the, how do you get a grasp on it is start to look at, begin at looking at your customer base first, because if you're chasing revenue and you've got low profitability, then I'd really want to understand what's the sort of cost to serve of those customers. And I would have a hunch that what you're gonna find is something that we often call the Pareto principle, which is that my hunch is that you'll find oftentimes that there's about 20% of your customers that account for 80% of your profitability. And probably the other 80% of your customers account for 20% of the profitability. So when, you know, that's not to say that you don't wanna sell to those other 80%, but it's to say that you wanna make intentional decisions about how much you're going to spend to serve those markets, right? So that may mean, you know, it could be expensive salespeople that you may or may not want, a different model, you know, for sales and delivery. Again, it could be contractual agreements. You know, one area that gets a lot of people tripped up is they start selling and they— the customers want everything on their contracts. Now you've got to manage lots of different contract terms and conditions of what you can and can't do. So again, all could be really good business decisions to make as long as you understand that total cost to serve and you understand what your bargaining or leverage position is. If you're in a business that's making anything, while inventory can be liquidated and converted, and we do call it an asset, it really requires you to be able to sell it at the margins you need to be able to sell it at. And too often, you know, companies get stuck with too much inventory that they either have to fire sale, discount, write off. So being very, very careful and judicious about how much inventory you hold. And last thing I'll say, Bradley, is I love to remind folks that every dollar you spend in your business, whether it's on, you know, paper, pens, whatever, inventory, people, is the same value but has different rates of return. And so, as you are evaluating all of that, it's make sure you're putting that capital investment in the stuff that has the best rates of return. So, long-winded answer, but I think there's a lot of different steps. Hopefully, the book outlines some of that, how to get started on that path.

Where can they find the book? Where would you point them to and how can they connect with you?

Yeah, the book's available on all platforms, Amazon, Barnes Noble. As mentioned, there's an audio version available. I've also got a website, peterkingma.com, so you can link from there and link to it. You can, you can download the intro to see if this is something that would be interesting to you. And then I keep all kinds of other con— I write for other periodicals, and so I keep all that content there as well.

Awesome.

Peter, this has been great.

Thanks so much for coming on.

Thank you, Bradley. Enjoyed it.

You know, my big takeaway is obviously going to be one that I've shared before, and it's a good reminder for me, is that profit is not cash. And I really did not understand that for a long time in, in the business. I remember the very first time that, uh, you know, I had less than $1,000 in the business checking account and asked my accountant at the time, uh, how do I have $32,000 in profit? And given the fact that I got my degree in finance from Auburn, I should know better, but I just didn't. I just did not. And, uh, but I began the process. And this is a good example, I think, too, by the way, is that, you know, there's a lot of different hats to wear in business, and it's really difficult to be really good at all the different hats that you need to wear in business. And I think that this is one of those hats where you don't have to be an expert at it. You don't have to be a CPA, but there is levels to where it's a skill that you can acquire. And just saying like, you know what, I don't really know what I'm doing. I think I need to figure out what I'm doing if I'm going to be in business because this is not making sense to me. Maybe that opens up, um, you know, some avenues for you to kind of explore that depending on the level that you're at. You know, one of our members literally a CPA, and then other people have just never been taught any of this. And so I get that. So check out his book, Cash Is King. Shout out to our podcast sponsor. Certainly it's a great segue for Club Capital. So if you want to learn the skills to help you in your journey, go to club.capital. You know, one of the things that you're investing— whenever you want to grow You're typically going to invest in some level of marketing, and you're going to invest in people. And if you want to invest and bring on— whether you're trying to scale, whether you're trying to staff up, or maybe you've had some turnover in your organization— Autopilot Recruiting can help you. Go to autopilotrecruiting.com. Autopilotrecruiting.com. I— one of the best investments that I've personally made is in my own investment in the community, being around other like-minded business owners that are trying to do the exact same thing as I am. If you're an insurance agency owner, go to coachpconsulting.com and find out about his Coach P Consulting program and how that can benefit both you and your team. coachpconsulting.com. If you're like many insurance agency owners, you probably started out with something like an Excel spreadsheet to keep track of your bonus, your salaries, your commissions, all of those different things for your team, and that's not uncommon. Well, over time, you want to be able to have some tools at your disposal. We talk a lot about mindset, skill set, tool set. One of the tools I would encourage you to take a look at is Today App. Go to todayapppro.com, todayapppro.com, and see how they can help pull that tech, which will integrate it perfectly with your corporate-approved CRM, and be able to help take a lot off of where you're normally having to do a lot of manual entering. Now Today App Pro can help you with that. TodayAppPro.com. If you like some of the stuff that I share, go to BlueprintOS.com/assets. Take a peek at some of the free assets that we have there for you. BlueprintOS.com/assets. All right everyone, till next episode, lead well.