What Owners Need to Know About Cash Flow – Earle Durham

What Owners Need to Know About Cash Flow - Earle Durham

How healthy is your company’s cash flow? How often do you check your business financials, and which ones are you reviewing regularly? If these questions make you clutch at your chest, you can relax! Earle Durham from Supporting Strategies is here to help you make sense of your business financials, understand your cash flow (and how to improve it), and make sure your numbers make sense to you.

Rich: Our guest today is the owner and managing director of the Merrimack Valley and Southern Maine franchises of Supporting Strategies, an outsourced bookkeeping and controller services firm. He has a very diverse background. He has a BS in engineering from Rutgers University and completed an in-house executive management program administered by the highly rated Nyenrode Business University.

An experienced business development executive, he has a long track record of enabling organizations to overcome their complex business challenges. He enjoys implying the strong analytical skills, strategic thinking, and business acumen to help clients profitably grow their business. And of course, deal with economic disruptions should one occur.

We’re looking forward to jumping into business financials and cash flow with Earl Durham. Earl, welcome to the podcast.


Earle: Thank you for having me

Yury: Earle, this is very exciting. And right out of the gate I wanted to ask you this question; I know that you have not one but two franchises of Supporting Strategies, what led you to getting two?

Earle: So the big motivation was personal. So I was having success with a territory down in Massachusetts. And as Rich knows, I’m in the process of building a home in Kennebunkport and looking forward to becoming a full time resident up in Maine. And when this territory became available several years ago, I jumped on the opportunity knowing it fit my long-term plans very nicely.

Yury: That is fantastic. So it’s always good to know your long-term plans, long-term goals, and adjust and apply tactics accordingly, just so you can get to where you’re heading. That’s awesome.

Earle: Yeah. And ironically, I found a neighborhood that we’re moving in from a networking event that I attended that was directly a result of Supporting Strategy. So it kind of all fell together.

Rich: Very nice, very nice.

Yury: Good stuff.

Rich: So I’m excited about today’s conversation because even though I’ve been in business for over 23 years, I always have felt like the financial side of things is my Achilles heel as you well know, Earle, because we work together. What are the basic reports that every business owner should be able to read to understand the financial health of their business?

Earle: Yeah. I often joke that there’s really three things that you should pay attention to for growing business in particular; cash flow, cash flow, and cash flow. But realistically for a business owner, there’s really three different financial statements that you need to look at.

One is your profit and loss statement. And I tend to look at them on comparisons, year on year, month on month, et cetera, looking for trends and opportunities to find improvements in the business. And more importantly, I also bench my own business against other businesses of like kind, or for my client’s businesses, that are similar there. So, you know, businesses on a P&L can look very different. Manufacturing company’s going to look very different than a marketing firm that has a lot of fixed expenses versus a lot of costs of goods sold. So you need to really benchmark yourself against the competition.

Most business owners understand P&L’s reasonably well. It’s kind of the one that’s most natural for a business owner to understand. The balance sheet is one that is often ignored, but is very important. It’s kind of a snapshot on where you’re at and how much your net worth is of your business at any point in time. And watching it trend over time, seeing improvements, et cetera is important, but we always start with clean balance sheets first because you can’t have a clean P&L if your balance sheet is not accurate. So we always start there.

And then the third is the more complex one and one that’s often ignored is cash flow statements. You know, you can run a simple cash flow statement out of QuickBooks or whatever accounting software you’re using, but it’s typically looking at history and telling you what happened. But the cash flow forecast tools that I like to use is really starting to project out and helping businesses project what’s going to happen in their business, when they’re going to have a cash shortfall, and most importantly, ‘what if’ scenarios? You know, what if your business gets shut down through a pandemic, or what if your business is growing really quickly? What if that big order you’re expecting is going to happen six months sooner than you thought, or six months later, and what impacts those have on cash flow. So that tends to be the most critical piece.

Rich: That there’s a lot to unpack there. And I think we’re going to dive deeper into quite a few things that you just said, but I do have a couple of quick questions to ask. One thing you mentioned, benchmarking. So how do we benchmark ourselves against other companies that are probably unlikely to be sharing their books with us?

Earle: Yeah it’s a difficult challenge when you’re doing it on your own, but if you have advisors like your CPA firm or you’re your case you use an outsource accounting or bookkeeping firm, we have experienced across 50 or something, different customers. I personally have three or four different marketing companies or clients. So it’s a lot easier for me to benchmark that than it would be for you as an individual business owners.

So I would recommend reaching out to a CPA firm or your CFO if you have one or your controller, whoever it is and get them to do some research on like competitors. And it’s easier when you’re using an outsource because they’re automatically dealing with a lot of different kinds of clients.

Rich: That was very helpful. The other thing that I wanted to know about is you mentioned that you got to clean up your balance sheet so that you can really develop a clean P& L what does that mean, exactly?

Earle: So when we take on a new client, the first thing we do is go in and reconcile their balance sheet, literally every account on their balance sheet. And it’s amazing how many times people will have a loan, and they’re just treating the whole loan payment as an expense. And in reality, part of that is going to enter some part of it as it gets an asset that you have on your balance sheet. So if you have that incorrect, then you go to your balance sheet. If that’s not correct, then when you go to your P&L and when it rolls over, you’re going to think you have more expenses than you may actually have. And it’s amazing how many times people will say, yeah, I reconcile my bank account, and then you’ll go and ask them, well what about these unclear transactions from two years ago? And they’re sitting in there and they were duplicate. So they had doubled their expenses on their books or whatever the transaction may have been. So you get a lot of inaccuracies there that then ends up not giving you a clear picture on what’s going on in your business. And it’s amazing how many times I walk into a business and see all this capital equipment. And none of it is on their balance sheet. Oh, you don’t own that truck that you drove up.

Rich: That’s helpful. Thank you.

Yury: Earl, quick question. So you mentioned different reports and different metrics that we need to be paying attention to, but how often do we need to be looking at those reports? Do we have to have kind of like a specific routine or a method? You know, I look at one report on Monday and then look at another report every Friday, at the end of every month, in the beginning of every quarter. What should be kind of like a mind frame for the business owners in terms of paying attention to these reports?

Earle: Yeah. I think you can break it down in a couple of elements. We recommend doing monthly financial statements. And that way you’re looking at your full P&L balance sheet cash flow statement, at least once a month. Clients that are running tight on cash, we look at their cash flow statement weekly sometimes even more frequently than that because they’re making decisions every day; Do I have to cut payroll? Which vendors do I pay? Et cetera. So cash flow statements can be looked at far more frequently if somebody is in a situation where they don’t have a lot of cash reserves.

When I look at some of the other statements, I like to pull out things that we call KPIs or key performance indicators. So a key performance indicator, like if you’re a retail store and you’re looking at multiple locations, for example, you may sit there and look at your sales numbers on a daily basis because that’s going to be a leading indicator on how everything else is going in your financial world. So those types of indicators you may want to look at very frequently. And it’s important to identify what’s really key to your business and how you’re tracking those, and especially ones that have a lot of variability. Those are the ones you’re going to want to look at more frequently.

Yury: In addition, you mentioned KPIs. Would we consider metrics like conversion rates or churn or lifetime value of a relationship or a customer as a KPI?

Earle: Yeah. They all could be. Again, it depends on the business. Lifetime value is usually more of a long-term decision. So helping a business owner understand if I land that new customer – the banking industry – if you bring on a new deposit account, the fees that you’re collecting upfront isn’t going to be all that significant, but I’m sure your bank has an idea of what the lifetime value is associated with that. So I think that’s helpful in terms of judging types of clients you want to bring on board, et cetera. But it’s probably not changing very dramatically, so it may not be one that I look at real frequently.

Yury: Awesome. Thank you.

Rich: So Earle, when you’re sitting down working with a company looking over these reports, what are you looking for? How do you read the tea leaves?

Earle: So my staff does the day to day work. So they’re going to look at it first and foremost from an accuracy standpoint. So while I may look at it for an accuracy standpoint, that’s really not what I’m focused on. I’m looking for trends, what’s changing in your business. If your sales pipeline is one of your KPI indicators, and it’s getting a little softer, then that’s going to indicate that you’re going to maybe have to make some adjustments down the road, or maybe it’s temporary and it’s going to correct itself.

 It could be just a timing issue, but I’m looking for trends. If you’ve got added expenses coming in, let’s say you decided to add in additional payroll. I’m looking at that before you bring that payroll on and trying to get an assessment on, okay, can I really afford that person? What’s going to be the return on investment? Is it going to incrementally improve the value of the business? So those are the types of things I would typically look for, anything abnormal, anything that doesn’t compare well year on year.

And then usually a couple of times a year, we’ll do a deeper dive where we’ll look at things like overall expenses. When’s the last time you had your insurance quoted, those types of things, just to make sure you have the appropriate coverage, you’re paying the appropriate fees for it.

Yury: Earl, what should business owners understand about cash flow?

Earle: Cash flow is something by the nature of the terminology is changing constantly. So if you are in a business and you’ve got pretty stable income and you have a lot of fixed expenses and they’re pretty stable, you’re going to see very little changes in your cash flow on a day to day basis. But where you really get into trouble is when you’re a growing business.

One of my clients has been growing really, really fast over the last few years, a million in revenue. When we started working with them, they did $15 million last year. So they got that huge growth on their curve. We watch cash flow every single week with that client because they have to pay their manufacturing company. They’ve got to pay their vendors. They got a biggest customer of theirs pays in 60 days. So they’ve got a cash flow cycle where if you just looked at the P&L you’d say they’re doing great, but if you ignore the cash flow, they may not be able to pay the vendors. And all of a sudden, now you can’t ship the product. And all of a sudden, now you can’t get the revenue that you got coming downstream. So we’re going to be managing that cash flow very closely, making sure they have sufficient working capital, which may mean going out to a bank and getting a line of credit. It may mean investors putting more money into business. It may mean holding off and taking money out of the business.

If you’re expecting a big project and you’re the owner, you may want to reserve money in the business out of your prior sales. So although those decisions are fluid and can change very quickly and a lot of ‘what if’ scenarios are important. What if they get that order? What if they don’t? What if it happened six months later? Because you may be in a situation where you’re really tight on cash right now, and you want to do everything you can to kind of stretch that out. Whereas, once those orders that you ship get paid 60 days later, you’re sitting there with plenty of cash reserves. So it’s very much a timing issue and very fluid.

Rich: So what are these reports, these cash flow reports look like? What are we looking for and is there more to just the numbers on the page here?

Earle: Yeah. So I think what we typically will do on the cash flow reports is try to put them in a graph format to make it a little bit more visual to allow people to see where there’s going to be shortfalls some of the months that more money’s going out the door then coming in.

Rich: And just to make sure, this is also a bit of forecasting as well, where we’re not just looking back, we’re looking forward?

Earle: Yup. Yeah. The scenario forecasting. So I typically think of it in three scenarios as kind of our basic, best guessed scenario is based on what’s the worst thing that could happen, what’s that a monster next door, if you will. And then the best case scenario, we win that big project, now what. So you want to kind of bracket it around kind of a worst case/best case. And then we ultimately come up with our best guess or the forecast, if you will. And I think that allows people to stretch and think about things in a little different way than if they just start by the best guess and they forget that, “Oh, you know what happens if my business shuts down in the first three months?” Which all of us are experiencing right now.

So you run into all of those types of scenarios that allows you to go in there and kind of see, do you have the appropriate amount of buffer in place? Do you have a line of credit in place? And trying to get that line of credit in place in business is great, it’s the best time to do it. I’m sure your underwriters, Yury, are much happier to give a loan out when somebody’s got a clean balance sheet and they’ve got plenty of cash reserves. Then they are when they really need the money desperately.

Yury: Right. Awesome. Earl, a couple of other questions. How can we improve our cash flow? And as a follow up to it, what are some things that strangle our cash flow, and what are some things that increase it?

Earle: Yeah. I think you can start with the basics on the revenue side. Obviously a strong revenue stream coming in. One of the things that I look for when I’m working with my clients, especially if they tend to be project related, is there any kind of recurring revenue stream that they can bring into their mix. You know, for my business, it’s very much a recurring revenue model. So I don’t have to deal with that so much.

I’ll use Rich for an example. He’s got a lot of project work he does, but he also has a recurring revenue stream. That recurring revenue stream helps smooth out his cash flow issues. He’s got money coming in on a monthly basis there that’s going to make that much easier for him to manage. Whereas if you’ve got somebody that’s only doing project work and they go for a few months where they’re doing a lot of work on a project, but they haven’t received any payments on that project yet, they’re going to be really happy to make sure that they fund that up front.

So where does that funding come from?  Lines of credits can help tremendously. Terming out lines of credit can help in a lot of cases, if they’ve got a situation where they use that line of credit for really a longer term investment. Maybe they should have termed it in the first place, but terming that out can help a lot. And of course, investment capital coming from your partners or your investors can help a lot as well.

Fast growing business in particular often reach the point where it makes sense for private equity or an Angel investor to come in and help them take it to the next level and get to that growth role far easier than if they were trying to self-fund it. Especially if somebody was just trying to bootstrap a business. Maybe they’ve got a great idea, they want to launch this new product, and they bring it to market. They get some market acceptance and now they’ve got to ramp up manufacturing and they realize, “Oh, I got to build a manufacturing plant. Where’s that going to come from?” Chances are the banks not going to loan that entire amount so they’re going to have to get an investors of some kind.

Rich: Makes sense. Is there a right amount of cash cruisers or cash on hand for a company to have, or is there some sort of formula? Because I’m sure it depends, but what are some of the things that we should think about when we’re determining how much money we should have in the bank?

Earle: Yeah. So there’s a million factors there and not the least of which is just the owner’s comfort level and what allows them to sleep at night. But if they’re out getting a line of credit and the bank is going to potentially expand that line of credit with their business growing, there’s going to be some criteria that the bank is going to put around there. That’s going to allow that loan to take place, right? They’re going to want to see that the owners have a stake in the business and they’ve made investments and that they’re not just taking all the money out to pay themselves, et cetera. So there are going to be some factors that come in place when you go to apply for the loan itself. But as far as the business itself, it really depends on when you do these cash flow forecasting, going in there and looking it out, and are there going to be months or weeks or days where you’re going to be really tight and then making sure you build in enough buffer to eliminate that tightness.

And that number can change dramatically from one business to another. And tight can mean something different to one business owner versus another. I guess some people that are more risk averse than other customers, and they’re going to want to have a lot more cash reserves than somebody else might. So you really got to kind of assess the own mindset of the business owner. And if they’re using outside funding, the mindset of their investors as well as their banks. And then from a cash flow forecast standpoint, you can project out where you have risk areas and make sure you put in enough reserves to cover those risk areas. That’s the easiest part, actually.

Yury: Earl, we talked a lot about cash flow, but we haven’t talked about cash on hand. Is there a relationship between one and the other? And which one should we pay closer attention to, or which one would make more sense to me to focus?

Earle: Yeah. So cash on hand is one of the variables in the cash flow analysis. So the cash on hand is literally just that how much money is sitting in my bank account or cash reserves. And in some ways you can think about that depending on how your line of credit is set up, how much you have in reserves on your line of credit, depending on how you’re using that line of credit as well. So that’s kind of your cash on hand. And a lot of business owners will manage their cash flow by just looking at their cash on hand. Do I have money in my bank account? The danger in doing that is you’re going to be writing a check tomorrow to pay this vendor and another check the next day to pay somebody else. And you’ve got accounts receivables, and you don’t know when that vendor or your customer’s going to pay you. The terms might be net 30, but what if they pay you in net 60 instead of net 30? So if you’re not projecting out and you just look on cash on hand, you can’t get ahead of the curve. You’re going to be chasing your tail, if you will.

Rich: It’s a nice segue because it feels like, I know you mentioned that cash flow is also looking forward, but it feels like we’re looking at things that are going on in the business right now. How do we take that next step forward and start to look at the future and start to forecast our revenue and expenses?

Earle: Yeah, I think the way we approach it at least once a year and depending on what kind of change is going on business, we’re going to want to go in and put together a budget for the year. And we’ll look at what your historical spin was, do some run rates, and kind of do an assessment on what that looks like. And then we start asking questions. What’s going to change in your business or what could change in your business in the next year? And those questions are where you’re really starting to get into the longer term forecast. Do I want to hire a person? Why do you want to hire that person? What is that person going to do? Is it going to bring in incremental revenue?

I’ll go back to the client. I talked about a minute ago that had such a big growth rate. Every couple of months the owner of the company has come up with a modification of his product. They’ll allow some to take to a new market. What does that new market mean to them in terms of growth? How much R&D money is he going to have to spend to develop that product? How long is it going to be before that product is launched and accepted by the customer? And all of those are going to require cash.

In some cases R&D could be just a few bucks, you know, minor modification. I’ve already got the resources. In other cases, it could be dramatically different. And you know, if you’ve got a company that’s been running pretty steady for years, and all of a sudden they’re thinking they’re going to go into a change of ownership, how are they going to plan for that? You know, they’re going to have to hire some resources to backfill what the owner was doing. So the business is more valuable to a potential buyer down the road.

So I think all of those types of factors require you to be thinking long-term, sitting down, and assessing what your options are. And then once you’ve done that, put a dollar on it and run the math to see how it’s going to impact your P&L, your balance sheet and your cash flow statements.

Rich: Yeah. I think I’m going to hire that part out. Thanks for that.

Yury: Earl, the purpose of Fast Forward Maine is to provide resources, information to business owners, to help them succeed. So part of a business success is financially healthy company or financially healthy business. So what steps do you wish owners would take for a financially healthier company?

Earle: So I think the first step is to get a good strong brain trust. So whether you have a formal board of directors or a board of advisors, or just informal. But having that brain trust that can help you really ask and answer those challenging questions that we were just talking about.

So that should include at the very least your CPA, potentially a business attorney, controller, financial advisor, whatever you might have to do your financial books. Whether it’s your bookkeeper or your controller, CFO, whatever you might have in your organization to pull together, accurate data there. But it shouldn’t just stop on the financial side. It’s just as important to make sure that you’ve got the brain trust to help you, you know, are you going to market the right way? Do you have the right access to your clients, or do you need to shift your model in the marketing and sales side of things? And the same thing from an operational standpoint, do you have the right staff and advisors to help you drive your operational side of your business? So I think having that brain trust and then the right staffing to support that is the most critical thing in any business.

And then once you’ve done that, then it’s a lot easier to go in there and take accurate clean financial statements, and then do the analysis to say, okay, what’s the impact going to be if we change ABC in our business, whatever that might be.

Rich: Yeah, that is awesome. And I think I have a new idea for a topic for an upcoming episode. So, all right. I appreciate that, Earle. We ask all the guests who come on to the Fast Forward Maine podcast, this question, because we’re looking for expert advice here. What one thing would you change if you could to improve the business ecosystem here in Maine?

Earle: Yeah. I was thinking about that the last couple of days. And one of the things that came to mind is we’re kind of in a unique time right now, where in some ways the world has created more and more borders to make it harder and harder to export products and services outside of your particular county, state, city, whatever. But in other ways, this Zoom meeting is a good example, it’s really opened up opportunities for people to think outside of their normal market. And I think there’s a great opportunity right now for businesses to reach outside of Maine and expand their market in a way that they haven’t before.

So I would encourage owners as they’re doing ‘what if’ scenarios and they’re looking at ways to maybe replenish some income they lost when the retail stores shut down and try to find ways to reach out and expand our marketplace. And I know a lot of retailers have done it. I have a couple of clients that have done this, where they had a small online presence before, and during this time they’ve managed to ramp that up and it’s helped them bridge the gap a little bit to get back up and running fully.

But the other thing it’s done, that’s probably even more importantly, is that to kind of open their eyes up to the fact that maybe this is a bigger opportunity for me than I realized. And I think in businesses, like your business, Rich, I’ve actually been able to reach customers far beyond Maine over the last couple of months by being able to do more things online and kind of reach a market in a different way. So I would just encourage business owners to think outside of their normal path to market and see if that opens up bigger opportunities for them.

Rich: Great advice. And we’ve actually, where we were putting on live events and only able to talk to people in a small geographic area, with the onset of the Coronavirus. We had to pivot – as people like to say – and we started putting on webinars that are more targeted for an individual audience. And that definitely has opened up new opportunities for us to reach people in parts of the state that we weren’t easily able to get to.

Earle: Exactly. I think Rich, you know I like the social networking. Facebook is not my thing. I go on Facebook because of my grandkids. But you know, LinkedIn and those tools, I find very powerful. But you know, in these days and times, the face to face meetings that I’m always more fond of and enjoy doing the most, it’s just hard to do right now. So you’ve got to find alternative ways to get there. And I recently posted an e-book around management tips and how to manage your crisis. And and one of the first people that read it happened to be an old colleague of mine in Den Bosch in the Netherlands. So that reach is far beyond just Maine.

Rich: Absolutely.

Yury: Well Earl, speaking about reach for those of our listeners who are intrigued by the topic and want to learn more or want to connect with you, are there any particular destinations that you would like them to explore, whether your website, your LinkedIn account, or maybe even your Facebook page if you have one?

Earle: I do have a public Facebook page, Supporting Strategies Southern Maine. So if you look for that, you’ll find that. And on that, there’s a lot of blog posts and stuff that come out of myself and my peers. We’re part of a franchise of 90 something locations across the country, so there’s good educational opportunities right there on that page. And there’s a kind of a constant feed on different topics that are relevant to business owners.

LinkedIn is probably the easiest way to reach me from that standpoint. And on LinkedIn, just start Earle Durham is my LinkedIn profile and that’s Earle with an E by the way, which makes it easy to get through all the search filters because there’s not that many people that spell E A R L E. So it allows you to get to me pretty quickly on LinkedIn.

And I did just recently post the e-book on the management tip one that I talked about on there. So if anybody’s interested in that they can get it there. And by far, the best way to reach me is just [email protected].

Yury: Awesome. We’ll share it with the audience Earl, thank you very much. It was an incredible episode. I feel like we could just grill you with more questions, and trust me we have a lot more. But to be respectful of your time, we may take it to a part two and part three at a later date.

Earle: Yeah. Be happy to.

Yury: Thank you.

Rich: All right. There was a lot of information there, a lot of ways for you to improve the financial health of your own business. If you want a transcript from today’s show so you can grab everything that Earle shared with us, along with all the links that he shared at the end. Head on over to our website, you can find it at fastforward maine.com/59. And while you’re there, feel free to click on the link so that you can subscribe to the Fast Forward Maine podcast. So you never miss an episode.

This is the part of the show where we reflect on what we learned and what our big takeaway was. We call these our ‘fast takes’. Yury, what was your fast take?

Yury: Well, the fast take for me was very surprising, especially in conversation around finances, is the importance of having a brain trust. It’s not just an opportunity to improve your understanding of your business, it’s actually an incredible platform to expand your horizons in terms of what your business is. Where do you need to pay attention? How do you need to execute? And most importantly, what steps do you need to take in order to increase the longevity of your business? I think it was an absolutely brain numbing thing, because you don’t think about a brain trust in the conversation around finances. But I’m glad that he mentioned that and it definitely sticks with me. So that’s my fast take. Rich, what was your ‘fast take’?

Rich: I agree with you. That was a great idea. And we were not joking, that is definitely going to be an upcoming episode on the Fast Forward Maine podcast.

For me, and obviously I work with Earle so I know some of this stuff more or less as his student, the three reports that all business owners should look at is critically important. That’s the P&L and the balance sheet, but perhaps most importantly – and the one that I have not been paying as much attention to – is that cash flow. It is the lifeblood of your company. And if you’re not paying attention to it, you can be very unpleasantly surprised. So that’s going to be something going forward that I’m going to spend some more time with each month.