The Three Rules of the Hole (plus a bonus rule)

I’m sure it seems like I blather on about the importance of good bookkeeping, and my clients don’t believe me until they get into a cash crisis.  If you remember last month’s story from Laura Meister, the struggle of getting out of cash-crisis was her big “Aha!” moment: she realized she could have avoided this had she kept better records, and looked at them.

While the long-term goal is to understand how to manage your business to never get in the hole again, there is no future if you can’t manage the current situation and get out of cash-crisis mode. Entrepreneurs get there when they’re not paying attention… and suddenly (though it doesn’t really happen suddenly), they find their bank accounts empty and their credit cards maxed out.  Vendors are banging at the door demanding to be paid.  It’s a scary place to be, but it is possible to get out of this hole.

The short-term, NOW-goal is to manage the hole and get out.

So what can you do to get yourself out of the hole, and stay out?  This article was inspired by the insights of Denise Chew, principal of Loupe Consulting. As a valued partner of my consulting practice, I have worked with Denise as she’s helped some of my clients navigate the hole.  Denise is an invaluable  advisor to my work with my clients, and we have often partnered on projects that needed her expertise in systemic financial management. I am always learning from Denise, and I know my clients benefit enormously from her contributions to their business development.  Many of you have already had the opportunity to work with Denise;  I encourage you to work with Denise to set up your financial systems before you need help navigating the hole.  Loupe Consulting provides expertise, systems building, and labor at all levels (bookkeeping through CFO) to build, oversee or staff financial systems. Denise once shared her father’s “Three rules of the hole:” quit digging, keep the dogs at bay, and climb out. After some reflection, I added a fourth (which you can read at the end):

1. Quit digging. In other words, don’t incur unnecessary or excessive expenses. Manage cash as if it were oxygen for a patient on life support.

• Identify your biggest expenses and manage them tightly. For most of my clients, it’s labor and cost of goods sold. Look at your labor schedule – do you really need all the staff working as many hours as they are? Are some employees racking up overtime? Look carefully at what you’re spending money on and make sure every dollar is carefully utilized.
• Figure out what systems you need to put in place in order to be sure these expenses are managed tightly. Create a budget for each day, week and month to decide what you can afford to spend money on.

2. Keep the dogs at bay. Manage and communicate with vendors about payment plans to keep your supply chain open. Often times, explaining the situation to your vendors can be enough to buy you some time. If they know you have a plan in place, they will be more likely to work with you. Put together a list of payables and clarify the priority in which they need to be paid. You should prioritize according to the following:

• Ensure that you can continue to get basic operating needs. If you can’t buy seeds then you can’t grow veggies to sell. If you can’t buy food, you’ll have no food to prepare for your customers.
• Minimize interest/late payment expenses. Credit card companies have more strict payment policies, whereas, other vendors won’t. Managing late payment fees will also help you to quit digging (see rule one).
• Understand and leverage your relationships with your vendors: are some vendors more flexible than others? Do you have good relationships that you can utilize to help stretch your payment terms for the time being?

3. Climb out. The fastest way to climb out of the hole is to increase the money coming in, i.e. revenue. Focus on growing sales and actively sell, sell, sell. Solicit ideas from your team members.  What systems do you need to put in place to help team members (and you, the business owner) sell?

Bonus Rule:

4. Get your head out of the sand. Too often, when entrepreneurs get so far in the hole, they panic and start to ignore the realities of their situation. It is indeed possible to manage the hole and get out, but you must accept what’s going on and be proactive. When you finally do get out of the hole, don’t go back to your old ways. Continue to use the systems and controls that you have put in place so that it’s less likely that you’ll fall into this situation again.

Find yourself in trouble? Use our Quick and Dirty Cash Flow Worksheet to help you manage your cash; or give us a call. We’re here to help.