Tick, tick, tick
How well are you managing the 3 clocks of small business?
By Jim Blasingame
Ti-i-i-ime is on my side - yes it is.
So sang Mick Jagger in the '60s Rolling Stones classic. As lyrics in a ballad, this is a nice, even romantic, sentiment. But in small business, it's hogwash.
Oh, sure, it's true that we all have the same 24 hours in every day. But in the marketplace, especially with regard to small business, there are three clocks at work: one for operating expenses, one for sales and one for cash. And the time that each of these clocks keeps is not always on the side of small business.
Let's take a closer look at the three clocks of small business.
The Operating Expense Clock
Operating expenses are different from vendor payables in that, for the most part, they don't vary as sales volume varies. Every month like clockwork - whether sales are good, cash collections are on schedule or profits exist - payroll must be met, the rent and taxes must be paid, and there are phone and utility bills, insurance premiums and a host of other expenses.
The Operating Expense Clock is hardwired to Greenwich, England, for accuracy within a nanosecond per millennium - nothing stops it short of a thermo-nuclear holocaust coinciding with a direct hit from Halley's comet.
For every operating purchase made and product or service consumed, new momentum is added to the hands of the Operating Expense Clock. The only way to influence this clock is through operating efficiencies. You won't be billed for something you didn't buy.
The Sales Clock
This clock is associated with the relationships you've worked hard and smart to create with your customers. Through persistence and perseverance, you have earned their business, the progress of which has been flowing through your opportunity pipeline so that sales will result each month.
You attempt to project which sales will occur which month by doing a good job of qualifying your prospects and customers and understanding their motivations, requirements and time parameters. You have quantified the selling cycle for each prospect, and as the transactions mature, you attribute a "clock" to each one as you budget for future sales.
A sale is made when a customer says, "I'll take it," or signs a contract, or gives you a purchase order. Notice that there is no mention of "cash received" in that definition. Yeah, there might be money accompanying a sale transaction, like a deposit or cash paid at a retail point-of-purchase. But for many transactions, the agreement to buy and sell is merely the first official step toward the exchange of cash for value received. The actual receipt of cash may come later, as in days, or much later, as in months.
The Sales Clock is logical and instructive. Even rookie salespeople, as consumers themselves, understand that a sale will be made when the prospect's purchase requirements have been met. And since they are right there conducting the steps of the sale, your sales staff actually experiences and participates in the creating of a "clock" for each sale.
But what is not so logical or instructive is the difference between Sales Clock time and Cash Clock time.
The Cash Clock
My friend Tim Berry, president of Palo Alto Software, says, "Cash flow is not intuitive." Even though I agree with Tim completely, knowing this still bothers me. Here's my attempt at a metaphorical handle that might help make the Cash Clock and how it works with the other two clocks a little easier to understand:
Cash is to sales as snow is to winter.
• You can have winter without snow, but you can't have snow without winter.
• You can have sales without cash receipts, but you can't have cash receipts without sales.
And expenses are like weather: You get some every day.
Time marches on
I have already told you that NOTHING slows down, let alone stops, the Operating Expense Clock. Unfortunately, there are many circumstances that can impede the ticking of the Sales Clock. And for every glitch in the mainspring of the Sales Clock, there are 1,000 sprocket failures that can happen to the Cash Clock.
Unlike the rock-steady ticks on the Operating Expense Clock, or the control you may have over the movements in your Sales Clock, many of the things that stop your Cash Clock are out of your hands. Just a few examples:
• Customer cancellations - These are a cash receipt train wreck.
• Back orders and order-filling mistakes - The customer is waiting, but you'll receive no cash receipts until orders are filled correctly.
• Freight damage - You reorder, but in the meantime, you're getting no cash from this customer.
• Delayed customer payments - There is a virtually infinite number of ways a customer can delay payment - and not only is there no cash, but vendors are calling.
Each of these, or any combination, can create havoc with your Cash Clock, even while the Sales Clock is ticking, and as the perpetual engine within the Operating Expense Clock whirrs along as if on a mission. Sometimes, incredibly, the Operating Expense Clock will actually seem to speed up: You can't believe it's Friday, or the first of the month, already. But it's only the perception of speed created by the slowing down or stopping of the Cash Clock. Alas, perception can be as stressful as reality.
Is your Cash Clock running?
In the song, Mick is singing smugly about knowing that his girl will come back to him. You will find very little smugness in small business. In small business, time is only on our side when the Cash Clock is running.
Some have said that most small businesses are undercapitalized. I say ALL small businesses are undercapitalized. When you understand how the three clocks of small business work, you understand that it is virtually impossible for a small business to be adequately capitalized.
Many small business owners have asked me how much working capital they should have in their businesses. My answer is always the same: "All you can get your hands on."
Jim Blasingame is the creator and host of The Small Business Advocate Show, and the author of the new book, Small Business Is Like A Bunch Of Bananas. Fortune Small Business magazine named Jim one of the 30 most influential people in America representing small business. IBM is Jim's Premier Sponsor.