How to make sure your business doesn’t run out of money - Lecture Series Part 4

All right, okay, well, uh, continuing on our streak of starting these on time— time, maybe we should put, uh, in the future that they start at 11:50 so people show up on time. But for the people that show up on time, like, one, this is the fourth one of these we've done. When we say we're going to start them on time, we— I want to start them on time to be respectful of you guys that are here on time. So, uh, if you, you know, whatever, the recording will be available so people that show up late can always go back to that. So, uh, today's lecture is one that, uh, I'm a fan of doing doing, um, and kind of the origination of this was about a year and a half ago I did a Twitter thread on a 13-week cash flow model, which is basically just like a very simplified forecasting tool that is used especially by people that are dealing with challenged companies. So I proposed to the team that we make this topic our fourth of the lecture series. I love doing these. This is great for topics that involve a lot of Q&A, and excited to do this one today. So I do want to introduce my surprise last-minute guest star, Chief of Staff Robin Smith, fresh out of her move to San Francisco. Robin is going to— has been helpful in putting some of this together and will be speaking today. So hello, Robin.

Hi.

Cool. Well, we're going to do a fun exercise with an Excel spreadsheet and she's going to like tell me what to do while she talks me through it. So should be good, just like normal life where she tells me what to do. That's perfect. All right. And we had 400— Ty, we had 440 registrants. Plus or minus 430.

I booked it right at 430 currently, but they're still rolling in pretty good.

All right. Well, cool. So mission for today, look, I think every business as it starts to mature eventually faces a situation where you look up and you're like, hey, what happened to all of our cash? So today we're going to walk through one of those tools and I'll talk in a second about who this is really optimized for, but it'll be very entry-level, kind of talking through basic cash flow management. We'll talk about some concepts around it and then I'll give give you some bad jokes, uh, and then we'll talk about some of the things to read and explore as you kind of dig into this type thing. Um, and so that's the mission for today, and then we'll have a ton of time for Q&A. And then Ty, I think, is going to monitor the Q&A, so feel free to type questions in the chat, and then Ty will interrupt, uh, Robert and I as necessary to ask those questions, if that works for you. Ty?

Bingo! Sounds good.

Perfect.

Okay, and yeah, this is being recorded, so this plus all the previous ones will be available to everybody. We'll email that out. So, um, today's audience is really business owners or aspiring business owners that have never done cash planning. You know, they're new to budgeting, new to forecasting, all that kind of stuff. Today is, you know, just enough to kind of get you dangerous about these topics and start to understand the concepts behind them. But this is not going to be comprehensive in terms of understanding cash planning, budgeting. That is a whole science and art to itself that changes a ton based on the type of business, but then also on how big the business gets. And I'll give you some books and stuff that you can go and read. Most of everything that I've learned about this space, I don't have— I didn't ever take an accounting class, any of that kind of stuff. I've learned from reading books and then talking to CPAs and accountants to try to understand things. So I feel like I'm proof positive that you don't need to have an accounting degree, an MBA, or any of that stuff to get very dangerous and very good at doing some of these type of businessy type stuff. So, so today we'll talk through a simple cash flow projection method. It's a 13-week cash forecast. We'll go through that and give you a tool that you can have on your own for free to use. And if you're in a bind or are scared of running out of cash, like this is a basic kind of budgeting tool and way to start thinking about cash flow forecasting that can keep you out of trouble. You know, there's lots of kind of rules of thumb about why businesses die. I will tell you the reason businesses go bankrupt or they die. It's universal. They run out of cash. So if you can just figure out a way never to run out of cash, then your business will go on as long as you wanted to. So cool. All right, so that's who this is for. Um, let me talk a little bit about why most of us who walk into a new business as a CEO underperform in cash management. Uh, number one, as I talked about, it's not taught in school. Like, if you get anything except for an MBA or an accounting degree, uh, or a management degree, typically you graduate college or any sort of other program without understanding this type of stuff, right? And a lot of people end up defaulting to bank account accounting. Um, so that's basically where they just do their accounting based on what happens in their bank account, and then their accountant goes and kind of cleans it up all after there. Um, bank account accounting can work really well because the bank is pretty good at counting how much money you have in your account, but it's not enough to predict and forecast what's going to happen in the future and keep you out of trouble. Uh, the other reason CEOs oftentimes look up and they're out of cash and that sort of thing, uh, is they get pulled in too many directions. There are more exciting topics. They make assumptions that just aren't true. A lot of times when I talk to folks who get in trouble with their businesses because they run out of money, it's because the CEO made decisions based on bad data. And that's because they didn't really understand what it meant to truly understand the cash flow dynamics and what's going on with the cash in their business and kind of all that type of stuff. So this is something that like when, when I was growing up as a young CEO, you know, my mentors and folks that I was business partners with were just like, watch the cash, watch the cash, watch the cash. And so for a lot of my companies, that's what I do all the time. Like I spend a lot of time going through each month and seeing all their transactions and making sure we have money and always worrying about that type of stuff. So one other mistake that people make, which is here, this fifth bullet, they will often build financial models for their business that are accrual-based versus cash-based. So remember, cash and accrual are different types of accounting methodologies. What we're going to talk to you about today is just like straight-up cash. Homey. It's not going to be any sort of the accrual type finance. You can have situations where an accrual-based business can look healthy, but it's running out of money. So today we're going to walk through kind of ways to manage and watch that cash very closely. And then what's the last bullet say? Overemphasizing— overemphasizing growth.

Yeah.

Like, look, guilty. I've done this before too. You invest too much in the business and that takes away your kind of margin of safety of cash that you had in the bank account to deal with bad times. And you try to grow too fast and you know, it brings the whole house, brings the whole house down. So getting your head around and your arms around kind of cash controls and, you know, the cash flow of the business is super important because it can make sure you don't try to get too far out over your skis and get yourself in trouble. All right, Robin, anything to add to this slide or the previous one? Perfect. Okay, let's do it. Let's get into some activity here. So I talked about trying to use this tool, and this is not something I invented. It's a 13-week cash flow forecast, and it is basically what what we're going to walk through here, and this is the tool you can leave with. But the reason I like doing this lecture about this tool is it starts to show you the concepts of how you start to manage the cash of your business very tightly and how you can start to predict and avoid problems in the future. Um, and the best thing— and, and I think experienced business people know this— uh, problems that you recognize 6 months before they happen are much easier to solve than problems that you recognize 3 months before they happen, or much different than a month before they happen. So like when I've invested in companies as a minority investor, a lot of times like the founder or the CEO would show up and be like, hey, I'm out of cash in 2 months. That is a totally harder problem to solve versus I'm out of cash 6 months from now. And being very like diligent about forecasting and predicting— prediction can make sure that you have easier problems to solve rather than harder problems to solve. All right, Ty, how am I doing?

Great, right on.

Okay, thank you for the encouragement, Ty. That's 10 out of 10 performance. Um, okay, so let's zoom in on this a little bit so it's big enough. Um, so Robin, maybe if this is where it's great for you to talk, do you want to just give us like— maybe just give us an overview of the whole thing and then we can go in and kind of play with it and you can tell me how to use it for like say, a fictitious business.

Yeah, absolutely. So this is the cash flow template from Scalepath. So, um, this is available for our peer CEO network. Um, so the template is intended to be extremely simplified because you're going to be in this template every single week monitoring it, and you want to make sure that it doesn't take up a lot of your time so you can focus on bringing in more cash. Um, so there's only a few sections that you actually manipulate. And then it essentially fills itself out through the boxes that we have numbered. And then at the bottom, there's a part that's just intended for tracking, which we will also go through as well. As it— as you can see, we have actual versus projected at the top because you really don't know what's going to happen, you know, 5 weeks out in your business when you're kind of strapped for cash, if you only have $10,000 of cash. So it just helps you keep an eye on it and project out to the future because, as Girdley said, it's easier to know way in advance that you need cash soon than within 4 weeks. So in order to kind of manipulate the spreadsheet, you start at step 1. So step 1 is changing the date to today's date, for example. So it's 8/8/24, and you only need to change it in the first box, and they will all change after that. And then you're going to put in your beginning cash balance. So this is doing your bank account accounting. So just take that number and put together all the numbers that are in all of your bank accounts. So Girdley only has $5 in his account. He's screwed.

Let's call it, let's say $100,000. Let's say we're ballers. All right.

All right. We are very safe. We have $100,000. We're doing great. So you put in your beginning cash balance and you don't need to touch the cash balance in any other week. You just need to know this week because you'll change it with your cash inflows and cash outflows and it'll update week over week automatically for you. Obviously, if things change and your numbers are way off, you'll, you'll probably notice as you go week over week, your numbers will change a lot and you can change the numbers at the top as well. It doesn't matter that much. It's your own, it's your own template. So step 2, you have your cash inflows. So any of your accounts receivable that you're getting throughout the week, if you're making money, you should write it in here. Um, and other cash generating income items, that's just kind of And space for you to put whatever you want. Exactly. If your mom gives you a loan, that's great. And any line of credit advances that you need to pull out that week because you need additional cash, you have a lot of accounts payable that week, for example. So once you put in kind of those lines 11 through 13, obviously it'll sum down at 14 for you. We're going to keep it really light this week. We've, we've made $5,000 and we took out a $1,000 line of credit advance.

So if I, if I could add, Robin, one thing I do when I've used this in the past here in this cash inflow section, I will go through and like fill out the lines to reflect what's happening in my business, right? Like, so if the money's coming in from different places or say like some of it's coming in from, you know, a lawsuit that we're going to win, right? Or that's a settlement we're supposed to expect or the terming out of a loan to go from to into, into like basically getting cash for a thing or selling a property. Like all of those are things where I put those in here and tend to give them their own line. So that way there's an appropriate level, kind of a granularity, so I can see at a glance where the money's coming from.

Yeah. And some people also just annotate this, so they'll just make comments to not add a bunch of lines. So it's up to you how you want to do that. But you could just leave a comment and say, won a lawsuit so that you remember that happened.

Cool. So we have how much money we started with, and now this week, 8/8, we're looking at bringing in $6,000. Yay us.

Correct. So now you have your cash outflows. So this is everywhere the money's going throughout a week. And obviously we left a lot of other rows as well because All businesses look different, so we want to make sure that people have the opportunity to put whatever they want into those rows. But yeah, you're going to write every single thing that goes out of your business for the week and this will help you. There's probably a ton of stuff that you have that you don't even know is in your business. So a lot of like SaaS subscriptions that you don't need. So this will also help you kind of reduce cash outflows as well by getting the full picture of that.

Yeah, so right here it looks like rather we have categories per kind of typical business categories, but somebody can go through and, and change these as they see fit.

And changing the other rows, and you can add more rows as well if you want, and just make sure that you keep the formula summed at the bottom. So row 35, just make sure that Everything is being included in that.

So, and then a question for you. So we borrowed $1,000 this week in cash to add to our cash balance. I probably have to plan on paying that back at some point, right? So should I go ahead and put it somewhere here in the cash outflows?

Yeah. So obviously you're going to have to do a little bit of math again of your interest rate that you're going to have and when you're going to pay that back. But you can just leave the principal, uh, you know that you're going to have to pay the principal eventually, so it should stay there. But interest, you're going to have to continue to accrue it week over week or month over month, however you have it accruing.

So let's say we borrowed from Tony Soprano and he's charging us 10% per week. That means I have to pay $100 each week in interest, so I can go ahead and put those out here until I repay that line of credit like this?

Yeah. Or you lose a hand.

That does potentially happen. Okay. And the week we borrow, we don't have to pay any interest. Okay, perfect.

Quinn had a pretty good question here on the outflows piece. Yeah. Should cash outflows be done in total when they happen or spread out? His example was rent, $2K for a month or $500 per week. Same idea with a yearly subscription.

Do you wanna go ahead, Robin?

Yeah, I would say that whenever the money is coming out of your account is when you should consider it. Because that'll help you understand how much money needs to come in that week. Because you don't want the bank account to hit zero because you didn't account for, you know, the $2,000 hitting in one week instead of 4.

All right, so then, good question. All that, so we put that down here and we burned through— we just left these numbers the same. This week we burned through $9,600.

Yeah, and that will take you down to Section 4, which is your weekly cash delta. So we lost money overall this week, um, but our weekly ending cash balance is not zero, so that's great. We're We're not out of money. We still have $96,000.

Yay us. Okay.

So that's pretty automatic. There's nothing that you need to do there. You just need to make sure that the number is not zero in row 38.

Got it. Okay. And then, so that shows we have $96,000 and I guess that shows up back up here for how much cash we expect to have to start next week.

Exactly. And obviously, as you get to know this model and you work in it more week over week, you can put cash outflows in it ahead of time, which is actually beneficial to you because then you'll know your kind of zero date. So if you know rent is coming, if rent hits, you know, on the 7th of every month, you should put it in for September already so that you know that week $2,000 is going to come out of your bank account. For example.

Super cool. Okay. So, and then down here, let's— we're on to section 5 and 6, I guess, Robin. Yeah.

So your account balance, your receivable and payable, this doesn't actually alter any of the numbers up above. This is just for tracking purposes. So if you're at a point where you're running out of money or you're worried about running out of money, you need to be very acutely aware of what's coming in and what's coming out. And this just helps for tracking purposes, understanding what you already owe and what you already need to pay people. So your beginning balance of accounts payable and receivable, any new invoices you get that week. So this will help you keep a finger on, like I said, random SaaS subscriptions. For example, if you get a new invoice for $2,500, but it's just for a SaaS subscription, you know, you probably might want to cancel that. But it'll help you keep track of different things that are coming in and out. And then also your estimated collection of invoices. So this is another tracking tool for down the line. So if you know something is going to be $2,000, and somebody's going to owe you $2,000 on September 5th, you can write that in way ahead of time just so that you can foresee things coming, but it won't change any of the numbers at the top.

Got it. So these two things really, at its highest core, help me understand money I anticipate to come in from an invoice standpoint where it's billed and it's taking time to get paid back, and then stuff I owe other people where it's billed and I have to pay them at some point where I have terms. Could be 5 days, 10 days, 15 days, 30 days payable upon receipt, that type of thing.

That—

is that how I should think about it?

Yeah. And you should still be tracking these up top as well, just so that they actually are calculated into your cash balance. But this will just help you understand and track it.

Right on. Okay. There's some questions, Ty.

Yeah, we had a few more questions. So Bentley asked, you had mentioned in outflows you might find something like a SaaS you didn't know you had, but what are you using to find that if you didn't know about it in the first place? Are you any— just ask, so are you looking over credit card statements? What— and Michael, you've talked about this some of like just the process for identifying expenses. Do you want to share your thought process around that for Bentley? Yeah.

Yeah. Okay. Well, I think Great question, Bentley. So I think when you use something like this in practice, what happens is you start, you start doing it for the first week. And then as we start next week, 8/15, we're going to do the process again. Okay. And one of the things we're going to do is we're going to go look at this beginning cash balance, which we started with $100,000 today. And how do I know we started with $100,000? Because I opened up my bank account and it has $100,000 in it. Now, if I go look and next week when we go to start this on 8/15, I open up the bank account and it says $93,000, that means some money went out somehow that I didn't know about, or some money that I expected to come in this week did not show up. And that's where this process starts to work, where you need to go back and understand, okay, well, based on the transactions that are in my bank account, what did I miss and what do I need to change in terms of making this better? Because what ends up happening when you do it the first week is it's going to be a bit wrong. The second week it gets a little bit better. Third week gets a little bit better. Fourth week gets a little bit better. And then as you get to a point where you're starting to do this process for weeks at a time, you'll eventually get it to a point where it's pretty darn good, right? I'm doing one with a company right now and we were off like $60. Month over month. So like, like that was— I was kind of proud of that. So, so that's the way to do it. And look, the way to fill the cash outflows right now is like go through and look at your— where the money's going out. Like say what's— say this is what you're expecting to go out the week of this week, 8/8, between today and a week from now. But another way to make sure you're not missing anything when you go look at it today is go look at all the transactions that happened in the last week, in the last month, and see if there's any that you expect to happen this week that aren't put into any of these categories and are not reflected here. Cool.

Another question, and this one will probably be near and dear to your heart, Michael. What are the best ways to combat running out of cash in the first few months after buying a seasonal business? Post-sale, as the buyer, you likely won't have any receivables coming in for 1 to 2 months because that will go to the seller after the business. And if the business is seasonal, you could purchase the business heading into slow season. Any thoughts?

Yeah. What you should do when you buy that business or you buy any business is you should build a pro forma model, right? Pro forma, meaning this is what we expect it to look like in the future. I don't know why it's called that, but that's what it means in Latin or something. So you should build a model that gives you a prediction of what you think is going to happen with that business after the first few months that you buy it, whether it's a seasonal business or a regular business. And that pro forma model should look not that far off of this, right? It's time periods, cash inflows, cash outflows. And then kind of what the business looks like from a cash standpoint over the first, say, 12 to 24 months that you buy it. So before buying a business like that, like understand how much money are you going to have to spend because obviously it's seasonal, so no money's coming in the door. Understand how much money you're going to have to spend in order to get yourself to kind of your first seasonal revenue event. As a fireworks company owner, I will tell you, you learn to do this pretty well because it gets pretty important because calling calling mom and dad or your friends to borrow money when you run out of it is pretty annoying. So you don't want to try to do that. So that's the situation with that and that's how you deal with seasonal. But it's the same thing you deal with on any particular business as well. That is a more kind of same full-year revenue thing. The only difference is because you're seasonal and you can't get revenue other times of the year, you can't pull that lever to try to increase your cash. You just need to make sure you're not spending more than you have to get you to your revenue event.

Awesome. We have one more question.

Um, the Profit First one. Yeah, so Profit First, um, you know, Profit First I like a lot, um, just because it— for those of you who don't know, uh, first of all, I haven't read the book, I just read the Wikipedia article on it, so I think I understand it. But basically the system, it says instead of kind of doing budgeting that is kind of revenue first, and then you, then you work your way down to your bottom line of how much how much money you're going to get. What you do with running your business is you say, how I'm going to run it is I'm going to make sure me as the owner get paid first, and then everything else is going to work towards that. So you pick a profit target and then you build the business around that. So I think that kind of budgeting type stuff, um, in my opinion, can work well. What I would do in using this type of thing, uh, is this right here, distributions, dividends, that's money that goes to me as the owner. I would fill that in and say, this is what I'm solving for. Like, say my profit first is I need to make $2,500 $2,500 a week. Sounds pretty good, actually. And I just fill this out and say, congratulations, we are going to be building a budget where I get paid $2,500 a week first and go from there. So based on that concept, that's how I would use it. I have not used the Profit First system at all. I have used the idea first, which is to remember that I own this business because I want it to pay me, not because it needs— it needs to exist because of me. Vice versa.

So Few more questions. Brett said, does doing this manually and every week is daunting. I take all of this very seriously, but I try to automate it as much as possible. Any suggestions on how to automate this so I can have a dashboard to stay on top of it?

Yeah. So there are tools out there like cash flow forecasting tools. I think even like QuickBooks has some stuff built into it. You can totally do it that way if you want to use some of the cash flow and automate automation stuff around that. I tend not to do that just because it's a pain in the ass, frankly, to get those automations set up or harder than just kind of doing it yourself. I think you can go through and if you want to, there's very powerful features inside of this Google Sheet which we've shared with you where you can try to automate and pull data from stuff if you want to. Ultimately, like, this is something where most companies, especially if they're in trouble from a cash perspective, somebody at a very high level, CEO or CFO, is maintaining this thing because this just requires you to worry about the details and be in there and focus on it. And done right, it should take 20 to 30 minutes per week. Um, you know, I'm managing one for a company right now, and I'm spending probably 30, 45 minutes a week in there. But, you know, like, that's just— that's— I'm willing to spend that because I, I don't want to run out of money. So happy to do it.

So, well, we have a few more questions, but we didn't want to— do we want to go back and we can loop back to these in the Q&A portion.

Yeah, for sure. Well, I think we're starting to answer some of them by going on there. So, okay, so Robin, I've used this, I've filled out the first week of the company. Fast forward to a week from now and it's 8:15. So it's next Thursday. I pull this back up and I look and I look at it and what do I do now?

So you're going to look at your bank account once again and make sure that your numbers match up. Like you said, they probably won't. So you're going to have to do some searching and figure out what you're missing. And then from there, you repeat the process all over again. You go through and you look at all your accounts and you take all your cash outflows and inflows and you try again and you try and get a little closer to what an accurate balance would be next week.

Yeah, and in that, in that process of kind of doing, um, doing actual versus forecasted, uh, I've, I've to some extent like I've put a little— when I've used this in the past, I've, I've added my own little thing to it because that's what I do. Um, and like I would put the actual like in a line like here and then like make this the projected and then like have a little formula and it would tell me red or green if I was like ahead or behind. So anyway, that's, that's one thing you can do. It makes, makes me feel good about myself. Um, so there is a question about why 13 weeks, and so let me answer that. So 13 weeks is primarily used as the duration of time if a company is distressed. So distressed means it's on the verge of running out of money. And so that's this tool that is commonly used for distressed companies. The reason for 13 weeks when you have a distressed business that you're trying to turn around is— 13 weeks is kind of not too long and not too short. It's like in the Goldilocks zone. So what people have found in practice is if you try to do— when you have a distressed business that's just trying to figure out cash week to week, 16 weeks or 36 weeks or 52 weeks is just way too long because you're trying to make sure you have payroll for 3 weeks from now in a distressed business. Similarly, doing 6 weeks from now is not enough time. And that's basically just kind of a rule of thumb of how people ended up as basically 3 months plus a week as being the right, the right number for this. If you're going to do cash forecasting for a business in general, cash flow forecasting for a business in general, whether that's by the quarter, by the month, by the year, by the 3-year period, it's the same concepts. You can basically just take this and instead of making it, say, by the week, you make it by the month. You know, and it depends upon the situation of the company as what's more appropriate there. I have some companies that are doing weekly forecasting. I have other ones that are doing monthly forecasting. Like, it all just kind of depends upon what's best for you and your needs and using this. But it tends to be the closer you are to needing to be precise on this because you don't want to run out of money, the more granular people end up being, hence the weekly approach to it. Let's see. Okay, so Robin, there's a question about, are the answers— invoices received values linked to the cash flows, or do you have to manually put those in?

Yeah, this isn't connected to anything at the bottom, like the account balance section isn't connected, so you're still going to have to put those in manually up in your outflows and inflows sections.

Yeah, Matthew, to your question, like, how do you go to the next week? Here's how. Once, once we go through 8/8 and we move on to the next week, I just go and I hide that sucker, and then I add a new week at the end. So that's how, that's how I deal with going from week, week to week, um, and the thing keeps building up like that. Yeah, no worries. Thank you, Matthew. Okay. All right, Robin, do you tie this activity into a measure what matters, tying into the metric you target in the business with financial reality, or do you find that measuring metrics to be a waste of time?

I think if I understand the question correctly, it forces you to measure what matters in the business. It, it is inevitable that you're going to realize that some things don't matter and some outflows aren't worth your time.

Yeah. Well, I think the thing I would add to that is measuring the money and where the expenses are going is a good thing. They tend to be a backwards-looking thing. Financial statements are always backwards-looking. So you say, okay, well, what's important is we need to start to think about what does the future look like? How do we predict the future? And that's where kind of measuring what matters or key performance indicators or under the EOS system doing a scoreboard like that is the set of data points that allows you to measure what and predict what you think will happen in the future with the business. Right. So that's not something we're talking about today. But like, I think KPIs are something that are really important to do. You want to have those metrics for the business. They allow you to predict the future. And as you can get better at predicting the future through those metrics, it starts to influence what the cash flow and stuff is going to look like, right? So if I know— to illustrate that— so if I know that I have a KPI or a number that I track to measure the success, say, of marketing, which turns into sales, which turns into closed sales, which turns into revenue, I can start to use that, project what my receivables are going to look like. And remember, receivables are the things that customers are going to be paying us for delivering and selling them something. So, but you see how those KPIs kind of feed and educate into making this spreadsheet better and making your prediction stronger and more accurate over time. Man, I was really proud of that answer. I feel like I got going. Okay. So, so now I've gone to the next week, Robin, and what do I, what do I keep doing? I just keep filling this out.

Keep filling it out. Keep understanding, understand what matters, measure your metrics. I think. You're, you're going to go through credit card statements, anything that you can find. And with time, it becomes easier and faster to go back to the person who didn't want to spend a lot of time doing it. Over time, you know where to look and you know the system because it's quite simple. It should take less time week over week, but you should get more understanding from it week over week as well.

Yeah, we had another question pop in. Nathan asked, how do you most accurately project what your cash inflows be beyond what you've invoiced? For example, you bill on net 30 terms, dot, dot, dot. But how do you know what to put in the sheet for weeks 5, like weeks 5+ out?

Yeah, well, ideally, ideally you have, depending upon your type of business, ideally you have some insight into who your customers are, how much they're going to buy from you, and when they're going to pay you. So the way to start to build that out is you start to look at whether you have them in your CRM, right, your software for tracking customers, or you have them in your billing software, you should be able to go from a bottom-up perspective on a customer-by-customer level and understand when they're going to be paying you and what. Right. And so that can vary depending upon the type of business you're in, right? If you're in a recurring revenue software business, that may look like, you know, you have 100 customers and they're each going to pay me this and a certain number are going to churn each month. I'm going to add this many each month. You can start to use that as a way to fill that out. Or you, if you're selling, say, pools, right, you're a pool construction company. You know that you have these 7 jobs teed up for the rest of the year. You have these 2 other ones that you're going to sell and you can start to predict what those dollar amounts are and when those people are going to pay you. But it tends to get a— be a buildup that comes from bottom up and you use that to fill out the receivables in that way. Just the same thing as you have your vendors and you start to kind of predict what you're going to be paying those people and when. All right, anything else we want to talk about on the spreadsheet? Otherwise, we'll go back to the presentation and open it up for some more questions.

A few people have asked, but we will be sending a link out to the spreadsheet as well after the call, just a heads up.

Super good. Okay, I will close the spreadsheet. I think we covered the whole thing. Yeah, this is available for free. Um, I have it on my website, and then Scalepath has it for free too, so Okay. We talked about some of the tips you can do to get better at kind of managing cash and stuff like that. You know, we talked about this idea of it's kind of a pain in the ass to be managing Champion or to be managing cash and stuff like that. Look, I, I find it entirely boring. The most boring thing I do every month is going through certain companies' expenditures and income line by line. Super boring, don't enjoy it, but I know I have to do it because it, you know, goes back to the North Star of what the most important thing is. Yes, Mark, the recording will be available later. I will send that to everybody. It will be on YouTube. Please check out my YouTube channel. I'm desperate for your attention. You can use working capital leverage to manage cash. So that's not something we're going to talk about a lot today. But there's things like a lot of people say when they have customers, they let their customer pay 100% of the bill after the job is done. Right? Like, how do you change that to where they have to put 50 or 70% down in order to manage your cash flow? And that ties in this idea of a cash conversion cycle. Cash conversion cycle is basically the idea of how long it takes for your transaction with somebody to convert into cash. So let's take an example of a business like a university, right? A university has you pay the tuition well ahead of the— well ahead of the teaching actually happening. Well, why do they do that? It's because they want to have that cash ahead of time and cash conversion cycles, which is this cycle of you get paid for something and then you help the customer and then you turn that into profits. Like, how does that cycle work? Well, it historically got measured in days, right? So if you built somebody a pool and then 30 days later they paid you the bill, that would be a 30-day cash conversion cycle where you convert the work to cash. So but there are a lot of businesses who shape it to where they try to get paid, if not immediately, early. Right? So for example, uh, for example, you have a case where a cash conversion cycle can be negative, where you get paid ahead of time, like the university there. So people will typically manage their business in a way to where the cash conversion cycle helps and they can get paid ahead of time. Um, number 4, I think being realistic about how much cash it takes to grow. We always underestimate how much cash it will take to grow and how quickly we will grow, which is to me where this last this last bullet is really important. Have lots of capital on hand. Like every time I expected like, okay, this is what I expect to happen and this is what I expect, I'll need $100,000 to run this business. And then I said, okay, well, I'll be safe that I'm going to make sure I have $200,000 in reserves to be able to deal with any black— big problems. I always ended up needing the whole $200,000 and sometimes I needed more. So like you want to be super conservative and make sure you have lots of Plan A, B, C, and D so you don't end up in a a situation where you have problems. And this bullet here, like, great CEOs, like, they are frugal as hell in terms of making sure expenses are always cut down. And, uh, there's lots of ways to make sure you do that in terms of everything from what you're paying in lawyer fees to rent to utilities to employee costs. You know, great CEOs really manage that super well. Um, one of my favorite stories is, uh, and it's changed a bit, but historically, if you went to go try to sell something to Walmart, you had to fly to Arkansas and you wanted Walmart to carry it, and they were, they were classic for their buyers meeting you in this like rundown office building that just had like chairs that were like falling apart, like bolts falling apart, and like they look like basically a school from the 1950s that had never been renovated. But that's because they were just incredibly cost-conscious, and that came from the CEO and the ownership on down. Well, we talked about some of this stuff as you start to make these estimates and use these concepts to build a budget for your business. Seasonality is an issue, like does it go up down. Um, retailers historically refer to a thing as Black Friday. The reason it's Black Friday was because they expect to lose money all the way until Thanksgiving, and then they make their profits around the holidays. That's why it's called Black Friday. That's the day they go profitable for the year. Um, there are other things to consider in estimates, you know, what sort of capital and lending things are available to you, how much money do you want to deploy on, on growth, industry trends. And this is things to be mindful about, like And this is a lesson I've learned over the past few years. Like, you have to be very careful to be truthful to yourself about things that historically have been tailwinds around a business and may turn into headwinds in the future. Right. Tailwinds help you. They make things better, but things can change and then those things can make it harder for you. And a lot of times we go in as entrepreneurs and expect things to continue the way they always have because we're optimistic. But in, in reality, the industry is turning against us. Liquidity is important, obviously. Like, illiquid assets are very different in terms of being able to access access that value versus cash and then your desired outcome through the whole thing.

So on that note, Michael, Nathan had a question and he wanted to call out— he's from On Demand Bulk Water, which Acquisitions Anonymous did an episode on, which is pretty cool.

Wait, is that the one in Midland?

Oh, sweet.

Okay.

So he'll probably respond, but his question kind of was around liquidity and he says ideally how much liquidity liquidity should you keep on hand in a growing business?

Yeah, there's no, there's no rule of thumb for how much liquidity to keep. My general rule of thumb is I try to model out like, okay, what is the worst amount of cash that I could possibly need if shit goes terrible? And then I at least double it, sometimes triple it. So the best way to figure that out is, okay, I want to know what does it look like if things actually go terrible? I build a budget which kind of looks like this 13-week cash flow model. Of what it's going to take for me to operate for the next year or the next 6 months. And then I say, okay, well, now let's make some assumptions. This goes really terrible. Like this doesn't go as I expected. This doesn't go— I expect this costs more than I expected. How much capital does the business need to survive that? And then that allows me to make sure I have that margin of safety. And it's just— I've just seen it over and over again. Like it's always ended up 2 or 3 times worse than I thought I could possibly get. And it's not always that things go horrible, but they tend to go horrible a lot. And the best way to do that is just be super, super conservative. In terms of being careful. So drive a Subaru, not a Ferrari. That's my advice. Okay, so this is the most boomer— well, I'm not a boomer, but this is the most Gen X thing I put here. This is from Ferris Bueller's Day Off. Uh, it's a great movie, I highly recommend it. And, uh, he's got this great scene where he was given clarinet lessons and he's playing clarinet to the camera and he sounds terrible and he says, never had one lesson. Which is exactly what I— you know, how I've learned business, how I've learned stuff about cash flow forecasting, accounting, all that kind of stuff. It's because I've read books and I've asked questions. And, you know, lessons aren't essential. You can teach yourself a lot of this stuff. So there are 3 books that I tend to recommend to people, um, going from kind of more basic to middle to hardest or more sophisticated in terms of these 3 kind of fundamental things. Believe it or not, the Corporate Finance or Budgeting or Accounting for Dummies books— I learned a lot from those books. You can go through them really quickly. They're good to take somebody who's a total noob and at least make you dangerous in terms of how this stuff works. Works. So I like this book, Corporate Finance for Dummies. Uh, the Dummies thing is like, I think, a pretty great, um, you know, great series to use if you want to get up to speed on something fundamental. I learned about real estate, all that kind of stuff, just by reading books like this. It's kind of amazing what you can get for $25. Uh, these two other books are ones I would read after that. There's Corporate Finance, which is much more— this is where you start to learn about a lot of the more sophisticated stuff, you know, bonds, ratchets, warrants, all this kind of stuff starts to show up, show up here. And then financial statements. You know, today we're doing a very kind of dumbed-down, simplified version of cash flow for a company. There are other financial statements you need as a CEO, especially if you don't have kind of a business background. Learn how to read those and understand what they mean. And this financial statements book is a good introduction to that. Do I consolidate financial statements across each of your businesses, including cash flow? I mean, in my tax return ultimately, but the way I'm structured from a holdco standpoint, I do not. They each have their own financial statements. Okay. This is the one slide that is a commercial. So if you like stuff like this, you don't— you want to— you want to be in a community online where there are things like this being discussed. You're getting exposed to these things so you can run your business better, make more money and be happier and buy a Ferrari someday. We have ScalePath, which is an online community. It's a couple hundred bucks a month and we are going to bring on another cohort of people soon. We have just shy of 100 people in there now and it's really great. There's lots of people asking questions and stuff like that. So check it out, apply. We'd love to have you if you're a small business owner. I'm in there all the time. I wrote some stuff in there about how I was super sleepy today, so it was really high value add. So, Ty, any other words about ScalePath?

Jeff? No, just we have other resources similar to what the, uh, that we reviewed today with this template. And, um, it's a great place for if you're a small business leader, um, to just find a community to bounce questions off of. It's growing, and we've had a bunch of great sessions recently. So if you want more stuff regular like this, we have them weekly there.

Yeah, if you're a CEO looking to scale yourself and your business, like, and you don't want to join a high-dollar peer group, come see us.

So cool.

All right, we will email the recording, we will share the link, um, unless there's any other questions. I think, uh, kudos to you, Robin, great job.

Yeah, absolutely. Thanks everyone.

All right, everybody, see you later. Bye.