CPE for Government Auditors

Generating Cash Flow

Please enjoy this excerpt from the self-study text – The Four Principles of Happy Cash Flow – that I learned working with Dell and Walmart.  The economy is rocking right now – but don’t forget the value of liquidity when times get tough! 

Learning Objectives

  • Recognize the benefits of generating cash flow
  • Identify the phases of the business cycle and where cash flow principles are best applied

Years ago, an engineer friend of mine left his corporate job and started a company with four other engineers. They were all very smart about their product, global positioning systems, but had little experience in or knowledge of how a business works. As a matter of fact, my friend’s business title was Engineer in Charge of Finance and Administration.

The company never seemed to have enough cash in the business bank account when payroll time rolled around, and to cover the costs, they had to contribute their personal cash. His partners were confused and frustrated with him. They argued that they had just made a tremendous sale of over $200,000 to the Coast Guard. How could they possibly be short on cash? What had my friend, the Engineer in Charge of Finance,done with the money?

After much suffering, he approached me to get some help. I asked my friend a few questions, and I began to get a picture of what had happened to his cash. He was experiencing what many organizations experience when they either take their eyes off cash flow or don’t understand it.

All he needed was a little coaching to be able to figure out what to do and what not to do in his business. He began to watch cash and the things that impact cash much more closely. He was able to explain to his partners what had happened and what would happen given any decision they made in the future.

He did so well, in fact, that a competitor recently bought his company. Now my friend is a millionaire living a quiet life fishing on the Texas coast!

I hope that this text can help you like I was able to help my friend. The purpose of this course is to help managers, business owners, managers, and employees of both commercial and government entities understand the impact of their decisions on the lifeblood of any organization – cash!

What’s So Great about Generating Your Own Cash Flow?

Generating your own cash flow is all about control and self-sufficiency.

Think about it from a personal level. You don’t want to have to get a loan from your Aunt Harriet to pay your rent or sell your body parts to science in order to generate cash. After a while, those resources are likely to exhaust themselves. But, if you have a job or another source of income that you control, you have the ability to make your own financial decisions.

The same applies to corporations, governments, and not-for-profits. Those in charge should shield their organizations from the effects of shifts in the economy.

What benefits do you derive from additional cash flow? You can:

  • Pay your payroll
  • Reduce your debt
  • Buy back the ownership of your company
  • Provide more services to customers or citizens
  • Fund new technologies
  • Fund new positions and functions
  • Create a rainy day buffer of cash

Additionally, cash flow gives you flexibility and strength. Imagine having $100,000 cash in your pocket today. You could have a really good time! But, if you have that $100,000 tied up in your house, then enjoy staying home and watching cable TV because you won’t be able to afford any other sort of entertainment.

Cash also gives you the flexibility to act. If your organization has a crisis – or should I say WHEN your organization has a crisis – a buffer of cash allows you to respond immediately instead of wondering from which department you will have to extract the resources.

Another benefit of having cash is that it allows organizations to withstand economic fluctuations. In the past decades, we have watched the economy ebb and flow.  As I write this, the economy in my hometown Austin, Texas, is booming following the recession that took place in the late 2000s. Businesses again are hiring and expanding operations when, only a few years ago, they were laying off employees.

How to Generate Cash Flow

Cash is the most powerful asset you can have, and there are many ways to get it. Some ways are wiser than others, and each has its downside.

  1. Raise prices if you are a corporation, or raise taxes or fees if you are a government. The problems with these strategies are that customers may go elsewhere and raising taxes is seldom politically viable.
  2. Issue more debt. This debt comes with the obligation to pay interest and make regular payments. It also obligates future managers and citizens or customers to pay for today’s needs.
  3. Cut expenses. This could mean laying off staff or downgrading facilities.
  4. Seek equity financing. When corporations use equity financing, they sell pieces of their business as shares of stock, and the stockholders have rights to the assets of the business. Owners of the stock also get a say in how the corporation is run.

Even governments can issue equity. When Texas ran out of tax monies, we didn’t want to go into debt to build roads, so we used equity financing to build roads. We sold some of our lands, and the rights to these lands, to Spanish engineering firms who built toll roads for us. The only drawbacks are that the Spanish engineering firms keep the tolls and the rights to the land in perpetuity and the State is obligated to maintain the roads. Good deal?  I’m not so sure.

5.Use my personal favorite technique: make it yourself by wisely applying the Four Principles of Happy Cash Flow™. 

What Are the Four Principles of Happy Cash Flow™?

The Four Principles of Happy Cash Flow™ are practices that can give your organization new strength and possibly turn it into the cash-generating machine you always thought it could be! The principles are:

  1. Use other people’s money
  2. Cut the number of days in the cycle
  3. Pump up the volume
  4. Put a little in, get a lot out

We will discuss each principle in depth in the following chapters of this text.

The Four Principles of Happy Cash Flow™ can and should be applied to each organization, regardless of type. In this course, you will see how you can apply these principles to manufacturing businesses as well as service providers, not-for-profits, and governments. As we go through the principles, please keep your operation in mind.

Remembering that we are all interrelated is also important here. If corporations don’t do well, then governments do not collect as many taxes, and donations to not-for-profits dry up. If governments overtax, then corporations are unable to turn a profit and hire more workers who in turn pay taxes.

I have worked with, and have empathy for, all types of entities including the three major entities in the Austin area: the state, the University of Texas, and Dell. I have also worked with numerous associations: Texas Association of (fill-in-the-blank) and Walmart, the largest retailer in the world. You will notice, in this text, that I borrow heavily from my experience at Dell and my observations of Apple Computer and Walmart.

In the 1990s, Dell was a darling of Wall Street, and many Austinites will proudly tell you that they retired at 40 years old as a ‘Dellionaire.’  One of the keys to Dell’s success was how it managed cash.  Dell was a cash-generating machine. What Dell was able to do, which some of its competitors could not do, was withstand the slowdown in PC sales while keeping its prices consistently low.  The company maintained a huge cash reserve that it made by managing its cash and working capital well. Even as the market for personal PCs was declining, Dell managed to stay afloat.  After years of frustration in satisfying demands of investors, Michael Dell took his company private in 2014.  Many of the figures we will be using in this text are from the years when Dell was doing well managing its cash flow.  Because Dell is a private company now, we have no transparency into its financial results.

In this text, we’ll look at how Dell and other companies apply the principles of cash flow to generate cash for their companies. Apple Computer has put aside an enormous amount of cash by applying all four principles at the same time for a series of years. And Walmart has a great technique for managing cash flow, as do several other businesses, which we will look at in Chapter 5.

You’re probably wondering how you can apply the Four Principles of Happy Cash Flow™ to generate cash flow in your entity. In Chapters 6 through 9, I will show you numerous ways that you can employ the four principles to benefit your entity.

And, finally, in Chapter 10, you will learn how to forecast the cash flow you’ve generated using the Four Principles of Happy Cash Flow™ so that you can maintain your organization’s cash flow.

The Principles Apply Only to the Sales Phase of a Business Cycle

Before we get into too much detail, I need to point out that the Four Principles of Happy Cash Flow™, which we are about to discuss, APPLY ONLY TO THE SALES PHASE of a business.

A product’s life, or a business cycle, has three phases.

  1. Investment or development phase
  2. Sales phase
  3. Post-sale or customer care phase

For example, if you are a software company, in the investment or development phase, you must spend time and resources developing, writing, and testing the software.

In the second phase of the business cycle, or the sales phase, you actually make quantities of your product or service and sell it. For the software company, during this phase, you upload the software on the Internet and sell it to customers.

Some businesses have the post-sale, or customer care, phase, while others do not. For the software developer, this is the phase where you answer customer calls or conduct training to help customers use the software.

The costs of each phase differ for each type of entity.

I once worked with a school textbook publisher, and their development costs were incredible. They spent months and sometimes years developing textbooks.

Once the book was ready, the sales team was trained on the benefits of the book and then worked hard to sell it to as many districts as possible. The publisher hoped that the book would outsell all competitors’ books and have a long sales life. If the book sold little or became outdated quickly, it wouldn’t get a return on its investment.

The publisher also had a post-sales phase where it sold replacement books that it held in inventory and sent corrections to the adopting districts. Often, because competition for school textbooks was so intense, the publisher annually sent updates and new instructional materials to the districts to keep the content fresh and relevant.

It is important to note that companies like Dell and Walmart, who have huge cash reserves, have minimal ‘development’ costs (phase 1) or ‘post sales support’ (phase 3).  Calling Dell a manufacturer is an overly generous term. The company assembles components created by other vendors like Intel or Sony and puts its brand on the case. And Walmart only sells other people’s products and doesn’t warranty anything it sells. Anything returned to its stores gets returned to the vendor, and Walmart doesn’t pay for the product.

As we look through the Four Principles of Happy Cash Flow™, keep your thoughts on the sales phase of your operation.  For now we won’t concern ourselves with the costs of buying equipment, investing in the infrastructure, or setting up shop, and we don’t care about how much debt a company has. This is just about the day-to-day business of cranking out cash.

P.S. If you prefer to learn this via video – please check out this on-demand video version of the book.

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