Steve’s Dilemma: Invoice Rich, but Cash Poor

by Michael Hsu on June 18, 2013

PayrollSteve called me up the other day to ask, “Where’s all my money?” I did a double take, thinking he wanted me to pay HIM.

“What do you mean?” I asked.

Turns out, Steve is invoice rich, but cash poor. Meaning, he has plenty of business, invoices going out and payments coming in, but he also has a lot of cash going out. He needed to understand the difference between cash flow and profitability.

The definitions are pretty clear, but sometimes the application is a little more complicated. Cash is the amount of money you have in your wallet, in your bank, or under the mattress. Simple as that. Cash flow is the actual movement of that money in or out of the business. Profit is the (theoretical) amount of money you keep after you pay your expenses, it is closely related to cash and cash flow, but it is NOT cash.

Steve’s design agency is doing alright. They generate $1.2 million in revenue and earn a 5% net profit on that volume. Steve’s customers pay 30 days after he invoices them. And here’s exactly where the gap occurs. At month 1, Steve incurred $95,000 in expense that he had to pay out in cash (utilities, rent, employees) but didn’t receive a dime in cash on the $100,000 of revenue that he had “earned.”

What he really needs to understand is how he can convert that revenue into cash fast enough to sustain his business. This may mean he needs to increase his prices. At his current profit level of 5% profit, it will take him 2.5 years to climb out of this initial cash hole of $95,000. If he increases his rates to gain a 10% profit, he will be able to become cash flow positive in 16 months. Still not fantastic, but it’s a significant time saving.

Steve needs to make a decision as to whether to increase his rates for clients so that he can break even more quickly. Obviously, this is more than just a decision based on money. He also needs to understand his client base to see if it can sustain a rate increase.

If Steve’s story sounds familiar, then your company has either been in his shoes or you know someone just like him. Many mid-sized businesses are profitable, but have cash flow problems that can take them down. Having an understanding of your current cash flow picture is essential for making strategic decisions around your business.

In my next few blog entry, I’ll discuss how to systemize accounts receivable in order to get paid faster.

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DeepSky’s List of the Best Banks for Entrepreneurs

by Michael Hsu on June 6, 2013

Pending SalesA company’s relationship with its bank is built on convenience, ease of use, trust and, of course, lending. Because customers and colleagues continually ask for our opinions about large “name-brand” banks and smaller, community banks, here are my top-line thoughts on the ones that excel and those that lack what you need.

The DeepSky List is our always-updating lists of our favorite tools and services for entrepreneurs who are changing the world.

Winner: Bank of America

Bank of America wasn’t always our favorite because of its generally poor customer service to its personal banking audience. In the past year, however, we’ve seen an increase in customer satisfaction among our customers who use their business banking services. Finally, Bank of America takes the leading position with their latest online banking technology – providing most data and insight to end users among all the banks our customers are using.

Win:

  • Wire information more complete than its competitors; showing end users almost all of the relevant information to each wire transfer
  • Online banking search function is easier and more complete with filters
  • Transaction data are retained for a longer period of time than its competitors

Lose:

  • Business online banking service require separate activation and additional monthly cost
  • Multiple access for owner and accounting team is harder than it needs to be to set up

Honorable Mention: Chase

Chase had been our favorite for a long time up until this year. As a national bank, Chase tends to have the latest and greatest technology with the best user interface and experience. They are in second position at the moment, primarily because even though all the data and information are easy to access, there are limited information recorded. Check images and wire information are sometimes incomplete and require end user and accounting team to dig or recall transactions that’s happened weeks or months ago.

Win:

  • Easiest to set up multiple online banking access complete with access restrictions
  • Best online user interface and user experience
  • Offers remote deposit of checks

Lose:

  • Wire fee tends to be higher than its competitors
  • Pretty good amount of data retained but not as detailed as Bank of America

US Bank

US Bank uses a separate online banking platform called SinglePoint Essentials (separate service sign up and additional fees) for its business customers, which we thought it was interesting. The two system is pretty separate. The regular online banking is more of a consumer product and doesn’t allow much of a business access/integration. SinglePoint on the other hand only starts pulling data in from your bank after you’ve set up the service, which would almost always incur some data loss. User interface and experience is very old school and ledger-like and can be difficult to use.

Win:

  • Their customer service representatives are generally nice and trying to help

Lose:

  • Technology is segregated and not all information are synced
  • Generally takes a long time to get anything set up or delivered

Citibank

Citibank is opening up more branches throughout California and had always been pretty dominant in Asian markets. While their personal banking side usually deliver a good online banking experience, their business banking portal takes you back through time.

Win:

  • Great international presence means easier access to money while traveling abroad
  • Citigold service means different benefits and waived fees

Lose:

  • Online banking is outdated and difficult to use

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What I Care About When Looking for a Service Provider

May 28, 2013

Me. Sounds a bit self centered, but it’s the truth. Sure, I may care about your expertise, firm experience, and everything else but first, I care about if you care about me. Fact is, we  live in a noisy world today where it is hard for entrepreneurs to determine the difference between a true expert [...]

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3 Things to Outsource vs. 3 Things That Stay In-House

May 21, 2013

Steve was stressed when I had lunch with him last week. One of his most valued customers was upset because Steve was three weeks late delivering a good-sized project. The issue lies not internally – all the work there is done – but with an outside development firm that he had been waiting on. Stories [...]

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Get Your House in Order Through 3 Key Areas

May 7, 2013

Increasing your company’s bottom line seems simple. Just get more clients or customers, right? Yes – and no. A great way to grow is to secure more business, but let’s suppose you have a solid pipeline of prospects you know you can easily turn into customers. Sounds good, but what if you don’t have the [...]

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Why Are You in Business?

April 30, 2013

If the quick answer to that question is “to make a profit,” then my friends, it’s very likely that you’ve lost your way a little since the day you opened up shop. As Simon Sinek would argue, making money is a result of being in business, but it is rarely the reason you are in [...]

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