The Small Business Cash Flow Show – SBS 48

Greetings folks and welcome to the Small business show@businessshow.co this is episode 48 for Wednesday, January 6, 2016 and here in Durham, New Hampshire, I'm Dave Hamilton and.

Coming to you from South Lake Tahoe, California, I'm Shannon Jean. I'm very impressed that you got all that right, Dave.

Yeah, especially since we're going to talk about, we're going to wind up talking about the weather because it's really odd that we're both in, we're both in places where it's snowing.

Yes.

But, but we're going to have to divulge the fact because we're talking about the weather. Someone could cross reference this and chances are on the 6th we're not actually going to be in those same scenarios. We are recording this a little bit ahead of time. But I will say this. Happy New Year, everyone.

Yes. Happy New Year. And onward to an awesome 2016.

Yeah. Absolutely. Yeah.

Comes up, Comes up quick. Yeah, comes up quick. And today we're going to talk about ca. Right?

Cash.

That's the plan. Cash is king. Cash is the lifeblood of your business. My accountant always reminds me, profits are critically important, but cash is everything.

You have to manage cash flow first. Before you, before you worry about profits, you have to manage cash flow. And it's weird they don't. Well, I say they, I mean, I never really went to school for this kind of stuff. Maybe they do teach you this, but it doesn't like conventional wisdom. Everybody's always like, oh, where are your profits?

Profits?

Where your profits? Like, where are you coming from, man? It's all about cash. You gotta have it now.

That's right.

I, I want to, I want to get into this, but I want to state right up front when we're talking about cash, we're not limiting it to businesses that actually exchange green, you know, pieces of paper with green writing on them for their services. We're talking about the money you have available in the bank or in, or in a pile of cash. But for our purposes here, they're one in the same. It's one of them.

That's right.

Things that you can do with as you please immediately as opposed to, I need to sell that first before I have cash.

Yeah. What liquid. Liquid is a critical thing. And I'm not sure how long it took me to develop the habit of the first thing every day checking the balance either at the bank or in and whatever other accounts. And, you know, seeing that, that where you're, where you're at. And I think that, you know, there's always this battle. I'm certainly no expert at accounting and I always kind of battle the bookkeepers and accounting about where we spend our money. Because most of my companies have been inventory driven businesses. Yeah. So I'm always battling for cash. I need money to buy X. And especially with the companies that have purchased, you know, product to refurbish or whatever opportunities you may come across. It's not like you can just pick up the phone and say, hey, order me 10 more widgets or a thousand more widgets. You get a phone call and somebody says, I've got a thousand widgets. Can you take them today?

Yeah.

And you need the cash to take advantage of those opportunities or you'll just miss them.

Right.

You won't have it. And explaining that to an accountant or your bookkeeper where you say, hey, I need access to this. And they say, well, how much are you going to need?

All of it.

Yes. And often the answer is, I don't really know yet. Because I haven't struck the deal.

Yeah. Because somebody has. Because the phone call hasn't happened yet. Yeah.

Or I haven't stumbled across this or that. So it can be really challenging. But, you know, keeping aware of what's sitting in those accounts for you to operate on is critical. In addition to, you know, okay, what, when's your next payroll? Once you start, you know, having employees, okay, what is your payroll? Okay, if it's whatever, 5,000 or $50,000 to make your payroll, you got to start thinking about that ahead. So you're, you know, your bookkeeper doesn't come into you the day before payroll and say, hey, I don't have the cash to pay this bill. Because you don't ever want to miss a payroll. That is the kind of sanctity of these people that are working for you hard and they're relying on you to come through for them every couple of weeks. And that would be bad. So checking your balance is critical. What I've seen over time is as everything has changed or continues to change, we interact much less with banks than we used to and much more with online, you know, merchant processors, whether it be, you know, Square or PayPal, Amazon, I mean, there's a number of them that we use for transact, transacting a lot of our business. Where before it used to always be a traditional bank, a traditional merchant account, and the money would show up every day. Now it's kind of spread out and I actually like it better that way. Yeah, it's a little easier to manage and move it around. And I don't know if I've said this before, I'm not a huge fan of banks. I think they, they don't understand for the most part your business. If you get a good, good bank rep that really delves into your business, there's, I guarantee you that they're going to get promoted or moved to another department as soon as you get them trained to really understand what you're trying to do. And well, that's the key is, is.

Developing a relationship and training them because it's, they will never understand on day one.

Yeah. And the way the bank works, you know, if you haven't dealt with laundry or whatever, you get like a relationship manager. So this person comes and they, they are looking for your business and you go, great. You know, you develop a relationship. And I'm a real personality driven person. I want to be able to go to lunch or have a beer and talk to this person about my business and what's going on. And they become your advocate for the bank. At the bank.

At the bank, right.

Yeah. Because there is a big faceless committee that makes all the decisions about what type of business, I mean, other than just having a checking account. But if we're talking about credit lines and you know, merchants and merchant process and different things, you rarely do you get to speak to the people that, making actual decisions and that can be frustrating to, to say the least. And I always beat my head against the wall because I can't make the presentation the way I would like it. You can only lay it out there to your relationship manager who typically changes all the time, you know, year in and year out, you know, and so you're constantly having to train someone about what it is you do and why they should invest in your business or be there and have your back. And I've just seen it over the years time and time again not to bash banks too much, but they love you when you know you don't need them.

Right.

They want to provide all kinds of services and loan you money and this kind of thing. But when it comes, when you do need them, if you find yourself in a pinch, they're typically not the ones that want to step in and help you.

No, no, they never. That's the problem. Well, you say that there's a committee that makes these decisions. It's true, but, but rarely, especially for a small business person, are they making these decisions with your business in mind. Specifically, it's usually just policy. And then do you fit into which category does your business fit into. Okay, here's the formula for you. And you can say, well, yeah, but. And good luck. Yeah.

It's challenging. And, you know, oftentimes running a business, if you're. You're looking. Working with your accountant, there may be years or quarters or however you do it that you want to run at a loss for some benefit.

Yeah.

Whether it's tax planning or whether you're going to take a. You. You say, well, I've got this stale inventory, and the best way to get a benefit out of it is to write it off.

Yeah.

But, you know, explaining that to your bank is just. Is just miserable, in my experience. And so you have to really, again, you're constantly trying to educate them and you're trying to make your case. And I just. And it may be that I've done it for so long that I've just kind of had enough of it.

You just had enough?

Yeah, I think that's it. So, you know, we do a lot of business with, you know, PayPal. I love those guys. You know, they're a wonderful facilitator of being able to take money instantly in whatever service or product, you know, you're selling, and to be able to do it anywhere you're at, you know, with your phone and. Or, you know, or a company like Square, you know, and the thing what we've seen now is over the last, probably last year, they really ramped it up, is these companies are now trying to get in the loan business. You know, they want to loan you money for your small business.

Right.

And, you know, they're not really loans per se. If you're doing business with PayPal or Amazon or Square, what they're really offering you is an advance against your merchant account. So, you know, you're collecting the money every day and you're selling your stuff and it's coming into that account. So they feel comfortable that, hey, we're gonna skim a little bit off the top and get this loan, if you will, paid back. And, you know, I love the concept. You know, often they charge a fee. They don't. They don't even call it an interest rate. But you need to watch out because it can get pretty expensive. And the other thing I've found, with little investigating, it doesn't really do much to build your business. Credit rating. That's one thing working with a bank will do is you'll get your own credit rating for your company versus just based on your personal credit rating. And that can be very helpful. You know, when you when you're trying to put deals together by real estate or do anything like that. So we see more and more of that stuff come around. And I've just seen, and from everything I've read, banks are typically lending less and less to small businesses these days, and there's this kind of vacuum. And these companies have stepped into the offer. Offer the service, which I think is great. Which is great.

It's good, right? People, you know, hear people like you at the banks or other companies here, people like you complaining about the banks. It's like, okay, wait a minute. We can, you know, opportunity knocks, right?

Yeah, that's right. That's right. And, you know, we started with, you know, PayPal. I'll tell you stories. Typically, if you're doing a ton of transactions online, and, you know, most of my businesses have all been that way, where there is no one there to sign a credit card slip. Right. Everything was done via the phone or on your website. And for years, the merchant processors, the typical ones, you know, first capital, and there's a bunch of different ones that banks use, they always kind of had this attitude of, well, if you don't have a signature, you're really out of luck if there's any problem with the transaction. And they kind of just turned a blind eye against the way the whole world has been moving.

Right? Yeah. When we went to get a merchant account, it was like, well, you know, we want to send you a thing to, you know, the card imprint. Yeah. And I'm like, well, okay, but it's going to sit in whatever box you send it in until I put it in the trash because I will never use it. You know.

That's right.

And they're like, well, you know, you're going to pay a penalty and all of this. It's like, well, don't you look around?

Yes, look around what's going on? And really, they. They just did not want the liability.

Right.

You know, and what I found very distasteful is so, you know, let's say you did a thousand transactions when you have one that goes, you know, goes bad, turns out to be some issue with it, and someone does a chargeback could be three, four months down the road. And I'm sure everybody knows what a chargeback is, but just in case, you know, the customer gets their statement and, oh, I didn't. I didn't buy this, or I wasn't happy with this, they call their credit card company and they say, great, we'll investigate it and charge it back and get your Money back for you.

Yeah.

Well, the merchant, the typical merchant processor, they would not call you, they would not send you an email. They would mail you a letter, and you would get this. We would see the money come out of our bank instantly, of course, and, you know, it would take it back, and then they would mail you this letter that you'd get a couple weeks later. It says, okay. And they would ask, provide the slip with the customer signature on it. And again, you'd call and say, hey, look, you get just some random person. And it would just, you know, was very frustrating. And I think that, you know, PayPal really stepped in and took it to the next level of, we know your business, we know what we're doing. We're going to put these other checks and balances in place to help protect. Well, themselves and us.

Yeah.

And we're going to confirm these things and we're going to provide you with some protection as long as you meet this criteria. And the, the, the biggest one was you're only going to ship to the billing address where the credit card statement goes. And, and that. That's awesome. Totally makes sense. And so we've used them for years and ran, you know, millions of dollars through various accounts. And again, you could have multiple accounts and, you know, you'd have a rep. And they really took advantage of, I think, the traditional banks and merchant processors just not integrating the ball.

Yeah.

Dropping the ball. That's right. Yeah. So, so these, you know, to see these guys now come out and say, hey, we're going to start loaning people money and doing these things, I think it's great. I think it's expensive. I will say the, the biggest benefit of a traditional bank is you kind of pay a traditional interest rate.

Yeah.

You know.

Yeah. So, yeah, you, and you use some of these other lending services. So. Yeah. What are those rates like?

Yeah. So, you know, a bank right now, you're going to, you're going to, if you have a line of credit, maybe you're going to pay 4%, maybe 5%.

Right.

Annually. And, you know, on some of these, like on a PayPal, they call it PayPal Working Capital. And you're going to get. They'll loan you a percentage of your annual PayPal account balance, typically, you know, up to 15% of what your sales are.

Okay.

And. And they don't, they don't check your credit. Credit score.

Well, you already have a credit score with them, right? I mean, in their own way. Not, not officially a credit score, but you have a history with them. And that's all they care about. Yeah, that's right.

That's right. That's what they want to see. And that's kind of how they, they go out and find these people to loan to. They say, look, these guys are consistently running this, this much cash through our, you know, through PayPal. Let's go see if they want to borrow some money, you know, because they've got this history. Amazon does the same thing. If you're an Amazon merchant and you're selling and doing very well and your feedback ratings are very high, you're going to be solicited for Amazon lending. You know, they, they want that. So the thing that you'll find is depending upon how long you've been in business and how much money it is, you know, with PayPal, the fee that they call it is typically going to cost you 15 to 30%, which is, which is pretty expensive.

Wow.

But if you, if you're turning that money quickly, I always liken it to how often can you flip that money and make other money, whatever. Other money. So let's say you make a 30% return and they're going to loan you $50,000. Where. How often can you flip that 50,000 and make your 30% return? Can you flip it five times, you know, before you have to pay it back? Because that's not a bad. If that's the only place, yeah, that's a good deal. And if it's the only place you have to go, and it's very easy, you know, it's, it may work for you. You know, they typically loan up to about $85,000. So you have to have a specific use for it. It's not one of those things where you say, well, I want to borrow it and just leave it and stick it in the bank.

Right, right. You treat it like a line of credit. Or is it. I mean, do you, you don't pay a fee until you, you draw upon it, Is that right?

Yeah, you're going to pull it. And when you go ahead and access those funds, they're gonna, then you're gonna start paying those fees, and you're gonna pay lower fees the faster you pay back. You know, obviously, of course they want to do that. Yeah. And Amazon is, is, you know, very similar. The most common interest rate is going to be about 14%, and they're going to skim it off your, your earnings. So if you generate $10,000 that week in sales on Amazon, well, your agreement with them is you're going to put X amount back into paying back that, that loan for them. And the more you assign to pay back, the less you're going to pay in that interest.

Isn't that smart?

Yeah. Again, it depends on if you're a high volume seller on Amazon. You're selling a high margin item and you're just going to flip it, flip it, flip it. And you need some short term cash to pay for product. You know, it might work for you, you just never know. You have to look at everybody's unique, you know, situation.

Yeah, of course, of course, yeah, yeah.

So, and Square is very similar. You know, there if you're a square merchant, they charge about 13%. You're going to pay it back out of your daily square balance of what you're running. So you know, it's. I haven't used Amazon, I haven't used Square. It'd be great. If anybody's out there that has used that, we'd love to hear from you, you know, feedbackus, share your story, what you like about it, what you don't. I met a guy at a trade show late last year who made a comment that I thought was very interesting is he was doing all his inventory was in the Amazon warehouses and the fulfillment by Amazon, which makes you qualify for the use the prime shipping service.

Sure, sure.

Which is really powerful. And his thing was they were doing Amazon lending so they felt that they had a lever, if you will, because you know, Amazon can be kind of finicky about your account, if you will and if you, if you give a bad run of maybe you get some bad feedback or maybe something goes on, they can kind of start restricting you pretty tightly. And this guy's comment which I never even considered was, well, we have their money too, so we, we feel a little more comfortable. And I thought that was very interesting. Oh yeah, you know, he had borrowed, he's like, oh yeah, you know, so we leave X amount worth of inventory in their warehouse and we borrow X and you know, we have their money to sit on. So should any problems arise, we feel like we have a, you know, bargaining chip lever.

Yeah, exactly.

Yeah. I thought that was fascinating. I mean it was a big company. I was, I was pretty surprised.

That's, that's really smart though.

I mean, I guess.

Yeah, yeah, I mean, I guess. Yeah, I get it. You know, it's ye.

Yeah, it's an interesting, you know, I would be an interesting conversation to sit down and say, well, you've locked our account, which absolutely could happen. Sure. And, but you know, we've got X You know, thousands of dollars of yours, and let's sit down and talk and we meet the middle.

Let's have a conversation about this. Well, and, And I get it. It. It might sound like this. This friend of yours is being, you know, overly. I don't know, being crazy. But if you've dealt with Amazon at any level on the back end, you know, on the front end, they're great. Right. Because. Yeah, you order something, you get.

I mean, it was, you know, it happened to just a random guy that I was talking to.

Yeah, but. But still.

Right.

It's. It. Amazon is ruthless on, on the end. And if they have. If they see one little thing that they don't like, it's like sever ties. Done.

Yeah. And, you know, selling on. On. On that platform is. It can be great.

Sure.

But, you know, you don't typically get the best. How do I say this? Customer service. It would be great if they provided the same level of service that they require you to provide an Amazon customer. Yes, they would be fantastic. And they don't.

But they don't know.

No, they don't. No, they don't.

No. And, yeah, we've dealt with them on the affiliate side, you and I have dealt with them, and I've dealt with them, you know, with, with Mac observer, too, on the affiliate side. And it's the same kind of thing. It's like, if there's any issue, it's just like, all right, you're done. Well, what, you know.

Yeah.

Seriously?

Sure.

Yep. And by the way, the payments that we say we're going to pay you, we're not going to pay you.

We're now not going to pay you anymore. That's right. Your account.

Yeah.

Yeah. It's interesting. They're definitely, you know, and we've talked about selling in.

Oh, did I lose you again, Shannon? All right. Sorry about that, folks. We had a little. Little travel Skype hiccup, but we're back. So. Yeah, here we are, Shannon.

Yeah. So, you know, before we run out, before the Skype gods give up on us completely, another new. You know, actually, I don't know how new it is, but another place to check out for financing is a company called On Deck. And they do small business. They do term loans as well as lines of credit. And a term loan can be great because a number of ways it can give you a larger chunk of cash. It also typically can have a lower interest rate, but it also requires you to be disciplined in. In the monthly payment, which I think is really important for A lot of businesses, because a very typical scenario in a small business is you get a line of credit. Let's say the bank says, okay, we're going to give you $100,000 line of credit. And it just sits there and then you start using it. And you know, you can start using it a little bit more. And if you become too dependent on it, you can quickly get it to and max out that 100,000. And then you're just paying the interest.

Right.

And you don't have access to using it and it just kind of sits there. And what's very common is in the bank or your rep will say, hey, let's convert this to a term loan, a three year loan or a five year. And that way you'll have a fixed monthly payment and you'll get it paid off. And so term loans are, I'm a big fan of them as well. Especially if, you know, you have some big capital expense or you're going to have.

Oh, did we lose you again, Shannon? I think we might have.

Some big. No, we're losing it.

Yeah, we're losing it. I, I will say this about term loans. They, they are good for getting you into a habit of paying off a loan. And the nice part is when you finish paying off that loan, you can still use. You now have access to extra money that you can either leverage the same way or leverage in a different way. But you've arranged your cash flow such that you're able to make this, you know, this payment throughout the term, when the term comes, comes due and you're, you're finished. Now you've got, you know, you've sort of figured out how to do that. And that's a valuable lesson for any business owner to go through is figuring out how to manage cash when you know you have fixed expenses. A fixed expense like that can actually be a good way to prepare for having employees if you're a sole proprietor, because it's the same kind of thing, you have a responsibility to pay out X amount per month, regardless of what your inflows look like.

That's right.

And that can be a very enlightening and freeing thing. Right? I mean, once you get to that point, you're like, whoa, wait a minute, I was able to do this. And this can be true in your personal life too. But you're like, wait a minute, I took on this big expense, I paid it, you know, I made it work. There were some months where that was easier said than done, but I did it anyway. And look, you Know, I can do this. It can, it can really help you build confidence as well as just building good habits, but it can help you build confidence in your business too. I did that early on, bought a server or something which we actually could have paid for in cash. And this is when servers were expensive. Now they're cheap. But, you know, I did it and I financed it over six months or whatever. I mean, it wasn't very long, but it was like, it was, it was one of these really eye opening things like, wait a minute, this isn't a big deal at all. I can do this, you know.

Yeah, that's right. And I think, you know, the most important thing in talking about lines of credit, the most important thing is you want to be sure at least one month out of the year you leave that line of credit at 0 or get it down to zero. And that may be as simple as not using it for the first month of the year and then starting to use it and then working your way to getting it paid off by the end of the year. Because that's what the banks want to see. So if you, you know, if you have a hundred thousand dollar line of credit and the bank can look and say, okay, yeah, they were in it, out of it, they paid, they made these payments. They want to see you paying it down, borrowing it again, paying it down. That's a healthy use of a line of credit. Yeah, yeah, really important. And that, that's one of the first things when you go to renew. And typically, you know, banks want to renew your line of credit, you know, annually, is they want to see that. Okay, how many payments did you make? What they don't want to see is, oh, I borrowed 100 grand and then all I did was pay the interest.

Yeah, I'm drowning over here, man. Yep, exactly. Yeah, yeah, they don't want that. Oh, it's just me again on it.

And that's not what they want to see.

Right, right. Yeah, totally, totally. All right, so it looks like the, the Skype gods are telling us.

Yeah, I know you are. Well, yeah, yeah. So. Yeah, I know, I know. So you know, that's drag. Yeah, yeah. So, yes, you just heard me at high speed.

You just heard me at high speed. And you caught up to everything. Yeah, but I mean, this is, you need to think about this stuff, but it's not scary. And it can be, you know, it's something where you actually do get to control what you do. But with, with anything, when you're comparing cash and kind of playing that, that game versus cash and credit. You need to be aware of what you're doing and start carefully so that you don't get yourself in over your head. And, you know, I mean, make it work. Don't. Don't have plans, like, you know, on the 25th of every month. Well, I'm going to fly to Vegas so that I can make payroll, you know, and I'll borrow some money. That's not. Not necessarily a good idea. It worked for FedEx once, but. That's right.

Once.

Once. Right. Yeah, exactly. Yeah.

Yeah. That's good. Awesome. Well, that's good. That may be all the WI fi we can use up today. I'm not sure.

I think. I think. I think we've said enough. I think this is good. It's good. Yeah.

Awesome. Well, we will be back with you next week, folks, and thanks for joining us. And take care, everybody.

Happy New Year, everybody, and we will see you next week.