285: Michael Hsu — Cash Forecasting Best Practices

Are you thinking about how to grow your business with near and offshore staffing? But you're also wanting to make sure that it's reliable, cost effective and really well done. I think docsa talent is the way to go. Here's why. They don't just fill your jobs. They bring integrity, top talent and a people first approach that's hard to find. I've known the people at Doxa talent for over 20 years now and I say that you can count on them. I have Talk to Docs of Talent and you won't be disappointed. Go to docsatant.com Bill G. Again, that's doxatant.com Bill G. One more time. Doxatalent.com Bill G. Check it out today.

Oh, it does help me get in the mood. The music does help me get my mojo on. We're talking about cash today. I should probably say some play some cash song, but we're talking about how to get smarter about cash forecasting today. Hi everyone, my name is Bill Gallagher, host of the Scaling Up Business podcast. We bring our shows like this to you every week. You could find them wherever you get your digital content. YouTube, Spotify, Stitcher, iTunes, wherever is all cool with us. Like it, subscribe to it, get them every week or go to our own website@scalingcoach.com and there you'll find all the notes and links and things like that that our guests bring to you. So also we can help you find a coach or give you some of the other tools from the world of scaling up. Scalingcoach.com. So today, welcome to the show, Michael Shue. Michael and I met actually years ago in a program at the Entrepreneurs Organization. And, and Michael is CEO of really two companies at this point, Deep sky, which is a financial consulting firm, and then a new business, measure and hack, Michael Hsu.

Hello everyone and thanks Bill and Lucy for having me on here. My name is Michael Hsu. A little bit about my background. My story is that I actually started this thing 12, 13 years ago and it started out just very basic. It was just an outsourced bookkeeping company that I was just going to, you know, make some money and then go into a real business. But then it really transformed in the last 10, you know, 12 years into something that we really want to teach entrepreneurs or CEOs really become get a hold of their financial literacy and get a full financials and just numbers in general in their business and in their lives.

Let's talk then about this. How did you come to focus on, I think this is a great topic in my mind because it feels like the thing that we have. I mean, a lot of entrepreneurs don't really understand their financials very well, but the world of cash management seems. And cash forecasting seems the murkiest of all. And in fact, even on the accounting side, there's no like an income statement, a balance sheet are really pretty standard. They look really similar. You might have different chart of accounts. But a cash forecasting tool, there's not a universal one that I'm aware of.

No, not really. And it's really funny that you mentioned that, Bill. I think entrepreneurs are used to words like cash flow. How much is your business cash flow and cash and cash forecast. And they use it really loosely. Sometimes it means profits, sometimes it means cash in the bank, sometimes it means access to cash. And you're absolutely right. In fact, you know, it's really funny. So the big three financial statement, profit or loss balance sheet and the statement of cash flow or cash flow statement. It's funny that you mentioned that because I believe even accountants that went to accounting school that want to have a master's in accounting don't really quite understand what the statement of cash flow is, which is crazy.

Yes. And I've seen people build ones that are really complex and then don't seem to match reality. But, God, it feels like they put in a lot of work to it and then others where it's pretty simple and it actually kind of works. And it feels like that's the test of it over time. Do I understand does what it tell me and what I can actually do. Is there a match between those things?

Yeah, yeah, absolutely. And it's unfortunate because, you know, because no one understands it. It's almost like a black box. Right. The joke is I always remember years ago, I had this client, a service client, come to me and then they had hired a consultant that's charged them, I think 20, $30,000 to do this elaborate cash forecast that's looking out five years out and literally how much the pens and erasers are going to cost, you know, to hire one employees. Right. And I'm looking at, I'm thinking, man, this took a lot of effort, but I'm not sure how useful it is.

Right. Yeah. I think there's a big balance there in those things. That is. There's a lot of elements that can go into it. Right. You think about like, okay, when I think about cash from sales, you also have to factor in the invoicing and collection time.

Right.

How long does it get to Actually get that cash in your hands. That's a factor in it.

Yeah, absolutely.

Purchases you may have to pay for sooner or later. Right. But the timing of that has a big impact on cash.

You're absolutely right, Bill. And the funny thing is, we talked about this, you know, in EO even years ago, a lot of people, when they think financials, they think just dollars, right? How much money I make and how much money I'm paying, they don't really think about the element of time. Right. And cash. It's one of those things that absolutely takes into account of the elements of time.

Yeah. So let's talk about some of the examples as we get into this now. I think I always love to start with stories I tell the guests before they come on. Make sure you tell the stories. So let's talk about your client and their whole up and down in their emotional state with the cash. Tell us about that.

So literally this was, you know, this week, right? This week that this client had. Came on board actually, you know, last week. And it's a. It's a. It's a. It's a marketing agency, right? It's a marketing agency that had done well in the last, you know, three or four years. And then Covid hit, right? They were on their way to get past $3 million, and then it bought down to barely a million dollars, like below a million dollar. And then now they're coming back up. And so the CEO came to me and he was really stressed. He says, you know what I don't understand. Like, I understand that we survived Covid, but literally one day I'm thinking, you know, hey, we're totally doing this. We're going to keep building. I'm going to hire more people. And then the next day, I'm feeling like I've got nothing in the bank, right? And if I looked at it, it was because he didn't have the ability, he didn't have the capability to do a proper, first of all, proper profit and loss, right. Based on accrual basis, and second, a good cash forecast to know, hey, if I spent this, you know, $150,000 on hiring a salesperson, am I going to be okay three months down the road, right? So his entire operation was actually driven off of his sales department, right? His sales manager are telling him, hey, you know What? We sold $300,000 this month, and everybody's celebrating. People are out spending money. And then next month, oh, we didn't sell anything, right? So I think one thing that me and a lot of CEO talk about is, I think this shows the most in Covid is that as CEOs of a company, we can't be emotionally affected from the day to day. We can't make our decision based off of knee jerk reactions or like, oh my God, I'm so scared right now, or hey, you know what I can do X, Y and Z. You really have to have an even killed perspective on what is going on in your business to be able to make those calm and collected and calculated decisions.

See, I feel like there's no escape. The emotional I'm going to feel up, I'm going to feel down. Each of us has different triggers. I kind of feel like it's inevitable that we're going to feel that, but we don't have to make the decision there. Like we can balance it with some real information. Oh, I'm feeling really off. All right, let me go look at the numbers and understand what's really going on.

You actually. Yes, because you actually reminded me of. This was years ago. This was got to be like six, seven years ago. And one of our common friend Greg Keys and I was doing this, I was talking to him and I was going, oh my God, I feel so bad. You know, I, I don't. I'm going nowhere. My business is terrible. I'm thinking about just shutting it down and then just go on and on and on. And then he looks at me and he, he waited until I finished the whole thing and then he looked at me, we're at a coffee shop and he goes, okay, that's interesting. Well, Michael, you're, you're, you're a cfo, consultant. How would you analyze your business? At that time it was just Deep sky only. And he goes, how would you analyze Deep Sky? I say, what do you mean? I just told you everything, like how it's going. He's like, no, no, no, like pretend Deep sky is your client. What would you do? So I pulled all the financials and I go, well. And I did the whole thing. I was like, well you know what? Profit is down, cash, blah blah, blah. And I just. And as soon as I laid it out, it was all the same event. But emotionally I felt completely different than I did, you know, just 10, 15 minutes ago. Because I had this really clear head of exactly what is going wrong and what is going right and everything that is going wrong. I know exactly how to solve it. And all of a sudden I felt much better. And you know, you saying exactly that.

You know, I, every time I feel a little off because of something went up or down. I step back and I look at, okay, what is our cash position, how are we handling? What's our year to date, how are we going on our budget, where are we? And, and I'll look at other kinds of factors. What's the impact of our show? How is our audience and our community growing? And when I look at those things, I get a whole different perspective. Sometimes I see things that are real concern. Very often though, it's better than I think it is, right?

Absolutely. I don't know what it is. I think, I think, I think as entrepreneurs, we exaggerate our feeling. Right. If we're doing 80, then we're thinking we're doing 150. If we're doing 60, we're thinking we're doing 12.

There are times when I'm well behind on a bunch of things and then I get an exciting new sale or new opportunity and I'm all jazzed up about that. But other things are really neglected and my desire is to sort of lean into the shiny new and play with that, put some attention on it, rather than dealing with, you know, like the core business.

Yeah. The things that you have to worry about. Right. And you see it in fast growing companies all the time. Because I actually have this other client, and this is a little bit longer ago, I'm guessing three or four years ago. And they were, they were. Back then, it was really popular. They were a subscription box company. You know, it grew extremely fast. Right. They were on Inc. 5000. They went from like $800,000 to 8 million in a matter of months. Right. And everybody's celebrating. Everybody is, you know, champagne is just flowing and you know, they're going to Inc. 5000 even. And it was amazing. But then when they came to me, it was actually one of the board members that invited me into the company when everyone else was so excited and they were like, we're looking at our bank account and there's no cash.

Yes.

So. So it's, it's. And, and I think people don't. I don't, I don't know. I don't know if we don't see it or we're not equipped with the knowledge to see it, or we choose not to see it. Especially in a fast. We're so focused on the growth, we forget that, hey, you know what, like what you were saying, in order to make that money, we got to spend money first. Right. And then we got to wait until that money comes back in. Right. And that's an Important element we were talking about in the beginning of the show about timing. That's an important element for entrepreneur CEO to really understand the concept and be on top of it.

Well, I remember many years ago when I had come from a background of working in sort of services based businesses and then I went into an inventory based business and after some hard work, we produced a big successful year, a breakthrough year. And my controller and CFO said to me, hey, you need to loan the company a bunch of money to pay taxes.

Oh, taxes. That's a whole.

Yes, we're profitable and the balance sheet's good. Where's the cash? Where's the money? Like, when am I going to get this thing back? And she's like, oh, you're not. And I said, okay, so if we're so profitable, what's the deal? And she said, it's all there. And she was pointing across the offices to our warehouse in the far corner. And I'm like, oh, it's in there. And she said, yes, you have too much inventory and you have been ramping up. You are profitable, but you also bought lots more and everything you have. So unless you can draw down that amount of inventory and get more turns of your inventory a year, you're going to be always out of cash. You're going to need ever bigger lines of credit.

That was exactly what was happening with that company. We're buying so much stuff, you know, and yes, we were selling a lot, but we're buying more than we were selling, right? And then it just gets forgotten, right? And as we're selling more, we're thinking, the CEOs were thinking, the CEO, the C was thinking, hey, you know what? We need more sales. You know, naturally entrepreneurs love to sell most of this, right? And we're actually.

Sell more.

Yeah, I'll just sell more. The joke, right? I actually just shot a video about this a while ago and I love this joke. It's like, you know what? I just, I just bought this phone for a dollar. I'm gonna sell it for 95 cents, but don't worry, I'll make it up in volume, right? So that's, that's, that's a joke.

What did they do?

Oh, we really struggled. We really struggled. That company eventually went up to 14 million and we kept borrowing. So we started borrowing from the bank, we started borrowing from the owners, and then in the end we were borrowing from Amex. And Amex are not cheap, right? And so we grew it all the way to 14 million. And then we did so much Marketing. We were spending 2 to 3 million dollars in marketing every year and we were not seeing anything. So finally we have to lock it down. We really say, hey, we have to lock it out. We got to do something with the inventory, all of the inventory. We got to get rid of number one. Number two, we really have to pay attention to our cost of sales. Each box we give them, we give them what we call vital numbers, right? We give them one vital number. I say each box needs to cost $16 and that's it. It can't get any more. The entire operation has to focus around that number and build around that number. Marketing has to fall between one to two dollars and so on and so forth. And we were finally able to take that company down from a revenue perspective, but then slowly becoming profitable. So I remember eventually we took it down to around 4 million where we were profitable. So we went from 808 million 14 and then back down. So. But there's no way, there's just no way for us to keep, you know, getting that large and becoming profitable and have enough cash to turn all those inventories into just. It just doesn't work. Like we probably could have done it if we have more money, but we weren't able to now with that company.

Yeah. This is a really familiar thing and this is a reminder of something we talk about in the book. A lot of the scaling up book and some of the ones that feed into it. Growth sucks cash. We know that when you're going to grow, you're going to end up spending more on marketing, more on products, you're going to hire more people. Unless you can figure out ways to grow with the same cost basis and maybe even leverage that growth into improving your gross margins, changing your terms, you're going to really suffer and struggle. We went through a period of growth and as we added in important new market segments, we. Well first in the downtime we went and we got better supplier agreements, right. Pleading hardship and that kind of thing. And then as we started to go up, we got better supplier grants. We said, okay, we've got hot things, lots of demand, but we need some better terms from you. We went to all of our new customers and we said we want you to pay as you go, not on net 30 billing or something like that. That actually turned the company into more of a self funding business, which was really great because at the same time there was a massive demand for new spending in new categories of things that hadn't been anticipated during the run up. Right.

Yeah, no, that, that's actually great. Like you were able to do that. And I think most people, first of all, they don't even know that they should be looking at that and doing that. And second of all, they can't. Because let's say I have this one, I have this one retail company. They signed a huge deal with one of the biggest retailers, right? A distribution company selling big, huge deal with retailers. But these large retailers are demanding. Their terms are harsh. Right? So we're going out there trying to find the money to make the stuff, shipping it, and then these guys want like 60 days, 90 days, 120 days term. And. And that's. That. That's a real hardship. But, you know, if you don't pay attention and you don't have a proper cash forecast to know, hey, what is the impact of this deal? Looking out at least 30, 60, 90 days. I think entrepreneurs are in real danger. And I think also that's why you see so many companies. Just remember we're talking about the Whitewater stage, that 1 to 3 million, back down to 1 million to 3 million, back down to one million. They just really struggle there. And then again at 10, again at 30, and so on and so forth.

Yeah, there's definitely a lot of forward and back movement as you work with this kind of thing. Talk about the other story you shared as we got ready about a company who went and learned something. They went to a workshop at their business group and then came back all upset because of what they learned. That I think it was an EO company. Share that story with us.

I don't remember what story that was.

You talked about a client who was in eo, he went to an EO event and he learned some things and it didn't make.

Are we talking about the. You gotta, you gotta working 40 hours a year. That one. Okay. Okay. Yeah. So. So I love this one. And I think, I think this is where a lot of people struggle. And this is actually part of the reason why I create a measure and hack because I think everybody talks about the importance of numbers, right? So the store. The story is this. They went out to EO event and then someone was saying, hey, you know what? You don't. You only have to work like a certain amount of hours a year. Right. But then they also claimed like 40 or 45% of those very few hours. You got to be reviewing your financials, right? Like almost half the time. So here's the guy who said, hey, you know, you only have to work like 100 hours a year. But more Than half the time you got to be like, reviewing your financials. You're reviewing the numbers of your business. But then the struggle is, what numbers? Like, which ones do I review? And then more importantly, how do I get them? Yes, I get them. And I think that's. That's a real struggle. Because the gap is that even though as entrepreneurs, as CEOs, we have all these resources, right? We have scaling up, we have eo, we have all these tools that we're learning to better run our business. The accounting industry, the financial industry, which drives most of these numbers still in. Most businesses are still very backward, very 100 years ago. They. They do nothing else. They don't really understand a small business. They don't really understand what the CEO need or the language of business to really operate and navigate. And that's a struggle. That's a real struggle right there.

Yeah. So how did that get fixed up? Did they realize that you can't just show up for a few hours a year and spend it all the time looking at your reports?

Yeah, I think so. It took a long time, right? I think it took a long time. And I think a lot of CEOs talk about this, right? The way they learn it is that we know this, we talk about shiny object, we go out to EO events, we learn something, we come back out and then we want like, oh, implement this. And our team knows this. They're like, oh, you know what? I'm just going to sit on this for a little bit until you forget about it until the next new shiny object. And cash forecasting, or what we are calling I measure and hack cascading metrics, the idea is that you can't just be a CEO pulling everybody to try to get these financials, get these numbers, get these forecasts, and it's a team effort, right? So. So a lot of the CEO was thinking, you know what? I'm just going to learn this thing, I'm going to take it back, I'm going to bring it to the CFO and then they're going to, they're going to do the job right. That's a cfo. Yeah, yeah. That's what a CFO does, right? They take it, take the thing, go back to the accounting department and do whatever they do and come up with a cash forecast. But it's not, it's not an individual or even an individual department's effort, because let me tell you this, your CFO have no clue. First of all, they need to understand the vision of the business. So if you're not already doing that, right? With your scaling up coach or with anyone? If you're not already having the vision plan or strategy plan that your CFO is a part of, they wouldn't know, right? Yes, we might know. Our goal is to get to 2, 3, 5 million. But what's the plan? And let's say your plan involve hiring somebody. Let's say your plan involved hiring somebody. The sales manager or the CSO or the CMO are the person that's going to know around the plan. So it's a coo. How many people are we going to hire? How many people, how we hire, all that stuff. So it's a group effort. What the CEO eventually had to do is they had to get everybody involved. Everybody has to understand where's the company trying to go, what are the numbers driving behind that? And also, how does my job impact the financials of the company, impact the forecast? If I'm a marketing director and I'm trying to do three marketing campaign that's going to last us $150,000, how is that going to impact? What are the expectations of that? Right.

And I think a key thing is when is that money needed?

Right.

Your marketing director. So are you going to pay that upfront? Are you going to pay it as we launch it? When are you going to spend that money? So you've given your budget for the year and you want so much for this agency and so much for that and so on. When is that money actually going to get put to use and come due and payable? So maybe you're going to contract in this, but they're going to give you 30 days terms or maybe you're going to pay half upfront and half on completion or, you know, these kinds of things are really common. So figuring out the timing of both the spend, the hiring, all of those kinds of things is really important.

Yes. And that's again tying into the idea of time. Right. So if most people think, hey, you know what, I need to hire a COO for $350,000, well, it's not really $350,000 right away. Right. It's for three months. Right. And then when are you going to pay it? Right. What's the cash outflow? What are the expectations and when are they going to bring the cash back in? Right. I actually have this one client and they were a super old client. I think they were one of my first back in 2010, 2011, they were design agency in New York City, super fancy office. They were in the Same. I don't know if you remember Foursquare, but they were in the Foursquare office back then. Yeah, it was a long time ago. And I think that CEO did it the best. You know, he, he, he's gotten to a point where he understands that the financials of the company, especially the cash forecasting portion, involves the entire leadership team. Right. He is probably the only, the only one of a handful of my client. For 13 years I've been in business, right. I'm going to guess like probably one out of just handful, maybe six or seven clients he has. Everybody shows up for his financial review, not just himself. And literally, as we're reviewing marketing, he's talking to the marketing director going, hey, here are the things that we need to change. Here are the behavior changes you have to make. As we're talking about operations, you say, hey, here are all of the people that we hired. How are they performing? Here's the action that you got to take in the next 30 days and so on and so forth. Because it is only then if you take the input from all of your experts in your business and drop it into a cash forecast. That's a true cash forecast right there. That's a cash forecast that you can stand behind and you will get really close. It doesn't have to be complex, but you will get really close on a 30, 60, 90 days perspective. And you can keep making changes as new information are coming in. And he was literally working here as one of the best CEOs that did it.

So we've been saying all along that a cash forecast is the thing you really need. There's not a standard way to do it. We've been sharing some of these stories. Let's walk through the steps. How do you build a cash forecast model, at least at a high level? Right. This is audio video. We're not actually going to build, but let's talk it through.

Yeah, absolutely. So first thing that everyone needs to understand on this call needs to understand, I'm assuming entrepreneurs and CEOs is that your cash forecasting model needs to follow your strategic plan in the business. Right. I'm guessing most people on this call understands the one page plan or you know, what your trajectory for the next year look like. Cash forecasting is not a standalone thing. I'm going to keep saying this because super important. First, you need to understand it follows that strategy plan. Second, you got to get everybody involved. Right. So the strategy plan is the CEO is dropping it down. Right. The first step is going, you start from the top sales and marketing, right? How much money are we spending on marketing? What is our marketing plan? Right. CFO is not going to come up with that. The CMO is. They're going to say, hey, you know what? YouTube is the biggest thing. We're going to do a podcast, we're going to do a show, we're going to hire all these people. This is what's going to cost. They're going to have to submit their plan, right? To the cfo, to the CEO, right? And then CFO say, okay, I see your needs. All right? Operations, in order to support that, what do you need? Oh, I need to hire, you know, five developers and five marketers. This is what they're going to cost. Here's what they're going to do. They can do this amount of work. Okay, I see that. Right? Operations, what are they going to do? And so on. So you got to get your entire C suite to submit their portion of the proposal for your strategic plan. Then the CFO can go to work. All right? Marketing is thinking this, right? Operations is thinking this. Everybody wants money. Everybody wants to put time, money and energy, which is three basic resources of business behind the project to push forward, to get to their goal. Now the CFO's job is to look at our budget, look at our cash position and say, can we afford it? Right. How much cash do I have? Right. If everybody, if everyone in the company is going to cost me a million dollar, but I have only $500, $500,000 to spend, I need to have that dialogue with a CEO with the C suite and say, hey, you know what? How does that work? Which one goes first? Right? What goes next? Which one is Q1, which one is in Q2? Now you're forming a cash forecast. Now you're forming a cash forecasting plan together.

So inputs from everyone, along with timing, operations, purchasing, production capacity, technology, sales, all of those things we want to think about, when am I going to have to spend what money? And all of that's going to go into it. We've got the sales then right at the top, and then there's something sold and we've got that plotted by month. When do we recognize the revenue, when do we invoice it, when do we collect it, when do we put it in our bank? Right? That's when you have the cash available. You've got starting cash. What do we got? Right now we're adding cash in at some point, and then you're spending something often before you've made that sale. All of Those things, every department we could put in and show the inflow and outflows of cash, right?

Yes, yes. And even as you're saying that, you notice how all the source data did not come from the cfo, right? Yeah. They all came from different. Various leadership teams. But the CFO's job is to wrap it all together. Yeah.

To build it.

To build it.

After I built that thing and I've got my ending cash or cash needed, then I like to put at the bottom what credit facilities I have. Do I have reserves? Do I have a revolving line of credit? Have I got a fistful of credit cards? Like, what are the. Because if I've got, let's say I've got a hundred thousand dollar gap one month or a $300,000 gap, but if I've got a million dollar line of credit, boom, I'm good as long as I'm also getting out of that in the next coming months and I'm not carrying it for too long. Yeah.

That intermediate level right there though, Bill, you're talking about next level, I think. But I can speak a little bit. We're talking about cheaper capital. Right. First of all, someone else's capital is always better. But be mindful, we're talking about intermediate. I don't want people to start thinking about this before they got that first part done. So get the first part done, but after that.

So the first part is you got. You're selling things and you're delivering them, you're invoicing them, you're collecting the money, you're depositing the money. And you have to think about all those things, I mean, including like, okay, I'm charging your credit card on this date. But. But then you've got about probably two, three days before that's in your bank in. In most cases. So that's all got to get accounted for in your model. You've got to build in those number of days, and then on the backside, then you've got all the outflows. When are you spending the money and thinking with each department manager about timing those things out, when is that actually spent? So you might commence a marketing campaign or some activity or buy something, but if you don't have to pay for it right away, it doesn't all go in as going out in that moment. You can spread it out over time.

Yes, yes, absolutely. And again, you know, you used to teach this stuff. That's what. I love it. So it's exactly right. Right. So you have to take all that. So that's the first part. And also remember, you have to make a profit. You have to make a profit, right? This is something that's really important. It sounds so stupid when I say it out like this, but it's the truth. So many companies, they barely make enough profit and they want to grow, grow, grow. Go back to that same company that we're going from 800,000 to 8 million to 14, right? And by putting more. I always say this, you can never solve a profit problem with cash, right? And I want to talk about this because we're going to talk about different capitals because I don't want people to think, hey, you know what if I'm not making a profit, like we tell ourselves all these head trash, I'm not making profit is because I don't want to. I'm growing. That's not true. You need to make a profit. So first of all make a profit. But then you can always solve a cash problem with profit. But once you get past that, I'm going to get back to what you were talking about, cheaper capital. I was literally working with this company, I think three weeks ago, and they haven't paid their taxes. It's what you're telling me, your story. It's like, hey, by the way, you're profitable, where's the money to pay the taxes they haven't paid? The tax man, he's on a payment plan. And then the government charges you interest, right? They look at what you make and then they guess, usually over guess how much you owe and they charge you interest. And that's expensive. Yeah, Right. So, so I always say this. If you got to do that, you might as well just go out there and find cheaper credit at 6%, 7% cheaper money, right? If you can get your vendors to fund you, if you can get your customers and you can get your, you know, friends, family and fools to fund you, anything's better than that. You got to pay the tax man, right? You know, you pay them and then you worry about it later on. But then, you know, don't try to think, oh, you know, I'm going to avoid it or try to use, you know, it's just expensive. It's, it's second worst than credit card, right? The worst is credit card, you know, at 20 some percent and second worst is the government, you know, 12%. So.

Well, if you don't need any money, if you run the business well and you're very clever and you're self funding and your growth is funding and it's all great, right? But then if you do it is like there's cheaper sources of money and there's more expensive sources of money and they all have to do with how good a credit risk you are.

Yes, yes.

And credit gets a lot more secured if you aren't such a good prospect.

Yeah. And credit gets really, a lot more fun. And I'm not, I want to be careful if we get all the way out there because that's. Now we're talking about really advanced level stuff. But I mean, you're right. If I'm, if I'm a really high, you know, if I'm a really, if I do my financials really well. Right. Essentially I can borrow money against my assets or borrow money against my cash and they're relatively cheap. Right. So you just roll. But again, if you want to do that, you better know every dollar that I'm spending today, when am I going to get it back? How am I going to get it back?

Yes. Because it can be very alluring. Oh, I can get this money from here and it's only going to cost me this much. But if you're not thinking about how that play over time, you might discover that you're funding something with a very expensive piece. You were talking about being profitable. And I work with a lot of companies who are not profitable by design and it is focused on growth. But I would caveat that these are generally tech plays and there's great gross profit. They just are spending a lot on marketing activities to buy a market share to establish or they're building their technology up. But the underlying cost of that technology over time relative to the expected pricing of it is actually very, very favorable. So they know that after they've built their technology, they've established a foothold in their thing, that they've got something that's really sticky and that's very high profit or gross profit. And now they just need to. Right. Size all that other spending and they've got something that is worth a great deal. Because somebody looking at that, a public market, private equity, other people go, wow, you've got something that's worth a great deal there. Your operations are maybe expensive or maybe you spent a lot on the R and D to get it going. But we could turn that off now and ride this thing for a while. And we see those companies, I mean, you think about all the years that Amazon was unprofitable.

Yeah, yeah. Amazon Zappos. Right. All these guys. Right. Yeah.

So many of them. Right. And they, they would. But that's a very different calculation than a Than an solo entrepreneur telling themselves oh, I'm building something maybe.

Oh yeah, right. Yeah, you're absolutely right. Like these guys are, they're smart. And I have, I have, I have. I don't do a lot of these because my clients mostly focus around like yours, you know, 1 to 10, 1 to 20 million dollar life, what we call lifestyle companies, right? Yes, agencies and they sell goods or E commerce, that type of stuff. But I have have a handful of clients that are in that they burn half a million dollar a month. Right. And there's, and we're not profitable, but they're also raising money. And it's really funny because for them I don't talk to them about being profitable because as they're raising money, nobody cares. No one on the investment board is going well, how many, how many percentage profit you got? They want to know how much market share you got and how fast are we growing and what's the tech behind it, who's the team underneath it. Right.

But it's different.

It's a very different, very different.

Right. So understanding what kind of a business you're growing can make a difference. And I think the other things that I heard here is keeping yourself like balancing your up and down emotional state. You get excited when you make a sale and a big contract. You get depressed when something doesn't go well, when somebody bails on you, when you have some kind of breakdown in your operations or production or that kind of thing. We go up and down, know the numbers, look at the numbers, build an evolving model. I have always liked building a weekly cash flow forecast because I don't spend money just monthly, I spend cash every week in and week out. Some things hit me mid month maybe you've got every twice a month kind of a payroll. Right. There's timing, things to consider in that. I love to build one with a kind of a rolling 12 month and have it built all the way out 12 months. In reality it gets less and less clear out there in the future. But if I built it out like that and I am updating it every week, it just makes an enormous difference in that visibility. If you know you're going to have a cash nightmare in six weeks, I've got a lot of time. If all I have is a week or two notice or I wake up one day and see, oh screw, I can't make payroll. That's big deep panic. You don't need that level of panic in the business. Right?

Yeah, yeah, absolutely. I mean you said it's just, that's that's the, that's really the beauty of looking out now. You're getting past just like most CEOs thinking general bookkeeping, like, oh, I'll just do a bookkeeper and pay my taxes. But if you're looking ahead, and I'll give you one example right now, it's a current client. Right now. They, they have always. They're a service business also in marketing. They, they, they have always consistently gotten paid late, 30 days late, right? They invoice at the end of the month. They get paid at the end of the next month. And then. But the same thing, their vendors, their cost of sales are also invoicing them. You know, after the end of the month, they're paying it. So it's always consistently 30 days late. Not ideal. Right. Ideally, we want them to pay up front, all that, but get past that for a second. But it's profitable, extremely profitable. Huge client clients that you and I will hear of on the news and all that stuff. But lately, lately, they still have, like $2 million in the bank. But we're seeing this, we're going interesting. In January, it took us 38 days to get paid. In February, it took us 32 days. In March, it took us 40 days. April invoices took us 45 days. May, invoices took it. And you see that number slowly climbing.

Getting worse and worse.

Yeah, yeah, we're still sitting on $2 million in cash. Most people, most CEOs will be like, yeah, we good. Right. But we're seeing that and we're looking around, we're digging through, hey, who's not paying us? Why is this going on? And you're able to navigate that. You're able to change that so you're not six months down the road and all of a sudden, like, where's cash? Right. And I think that's a terrible position for CEO to be in.

Yeah, I think that. So when you're in a period of high growth or when you have a lot of cash reserves, maybe you've just done a big raise, or you've come out of a period and you've got some, some more substantial cash or some credit facility, it can be very tempting to run a sloppy business. Expensive operations, buy too much equipment, too much material, that kind of thing. And that's really, really a dangerous place to be in and from. In those places, you won't necessarily watch the erosion of a good customer. Oh, they were good once. And then they start to get slower and slower and slower. And you realize, oh, my God. Or Maybe you've gone into a new segment, it's not one customer, but it's a whole group of custom industry is hard hit and you don't notice that payments are getting longer, that kind of thing. And then you go ahead and you ship them a bunch of stuff and you're like, oh, I'm never getting paid for that, am I? And then they go bankrupt. Yeah, yeah, like that's a worst case thing, right? But, but you, you said it.

I think it was, I think it was Jim Rohn that said this. It's like why, why do, why do people fail? Because mistakes is not instant.

It's a little bit every single day time. Then it builds up and then all of a sudden it's on your radar. But that's the same thing like flying into another airplane or driving into another car. It's a little speck on your windscreen for a while and then all of a sudden it's right there in front of you and it's all you can see, right? It starts off here and then boom. It's overwhelming. And it can be either a crisis or game over any number of things. I want to tell folks where to get more information. We'll put it up here on the crawl on screen and go out to. If you want to check out the tools at Measure and hack, it's MeasureXhack Co and Michael's Deepsky co. If you want to find out more about the company, if you want to see a little bit about us and our work and that kind of thing, you'll go to scalingcoach.com if you want to drop us a note, send it to info scalingcoach.com so again, measureandhack co deepsky co for Michael Shue scalingcoach.com for us. I want to give a big thanks to Lucy Summers producing our show, getting it ready, getting guests ready, scheduled, the show promoted each and every week. Thank you so much Lucy for helping to pull it together. And then big thanks over to the folks at Podfly Productions, Alby Burge, ein Codena, Tim McGowan who get our show produced and show notes written up and proofread and everything and out the door each week. Big thanks to Vern Harnish, author and creator of the Scaling up framework, the original Rockefeller Habits. Thanks to all of you for listening, watching each week. We'll talk to you later. Keep scaling up.

Bye bye.

Are you ready to turn your goals into daily wins? You should check out our scoreboard software powered by Align. It's the official software for scaling up. With Scoreboard, you'll get an AI driven coach for priorities and KPIs and it'll help keep your team focused on what matters most. With Align, you can track your goals in real time and you'll even see results on the go. With their mobile app, you can rest easy knowing that Align has world class onboarding and support to set your team up for success. This is really more than just software, it's what I actually use to manage growth in our scaling up client teams. Unlock clarity and results with Scoreboard by Aligned. To try it now, go to aligntoday. Com Bill G One more time. Aligntoday. Com Bill G that's aligntoday. Com BillG Check it out and try it now.