Walking the Fine Line

August 12th, 2008 Chris Posted in Financial | No Comments »

I’m not sure what you’re like, but we are notorious for taking pictures on vacation, uploading them onto the computer, and never looking at them again. We rarely even go through and purge all the extra shots we take to make sure one is perfect (’cause with digital they’re free!).

So the other day I was going through my amorphous pile of photos from the past ten years, thinking that I really should do a purge. I have to admit I did a quick calculation of the value of my time versus just buying a bigger hard drive. The latter won.

One thing I did do is take note of our trip in ’05 to Hawaii when we went to Kauai and saw the spectacular Waimea Canyon. But it was the sudden flashback of panic that really got my attention. As some may know, I am deathly afraid of heights.

In the Waimea Canyon, one hikes for 10K along very, very, very steep cliffs. In fact, I still remember following a particularly narrow path with 3,000 foot drops on either side (see photo). My panic was peaked to a near “Sir Robin” level when Colleen, who was following me, stepped on the back of my shoe, tripping me (when I got home, I did check for any unusually insurance purchases). Never has the expression, walking a fine line, been so viscerally real.

Often in our business, I feel like I’m walking a fine line between revenue and expenses. That’s not that dramatic, but what I always forget in that process is actually there is a third factor that is even more critical to manage related and seems much less deterministic – cash!

I’m definitely spoiled from my big corporate experience. While the CFO and his team constantly worried about cash, the business decisions were largely made on generating the right return on investment in the right time frame.

In our micro business, even if revenues equal expenses – they are lumpy. Which means cash can float negative and positive throughout the course of affairs, even if the business is breaking even. And some expenses can’t be dodged or delayed – like employee payroll or taxes.

The tool that I’ve seem most often used to address this is the line of credit. We had one in the business that could be tapped in case of those negative cash swings. Interest rates are quite low so the borrowing costs from interest weren’t that bad. What ticked me off, though, was the non-interest fees.

I dug into our banking charges one day, only to find that we were paying something like $30 a month just to have the line of credit and another $200 a year for an annual credit reassessment. So, even in the last year when we didn’t use the line of credit at all, we paid over $500 in fees. Screw that.

We were very fortunate over the last year and Colleen, our selling machine, managed to generate a very healthy revenue flow. Rather than ramp up expenses, we put the extra cash into our own contingency fund and eventually built up the equivalent of three months of operating expenses.

That way, pretty much anything short of a full disaster could befall us and we’d be OK for cash. And we don’t need that expensive line of credit any more. Even our banker couldn’t argue with the strategy (our banker from RBC, by the way, is fantastic).

So, do a couple of things regularly:

• Review your bank records to see exactly what fees you are paying and for what.
• When you do your revenue and expense planning (you do that already, right?), plot your cash impact.
• If your revenue is healthy, think about managing expenses so you can throw off some profit and build your own war chest over time.

By doing those things, we’ve been able to get our cash situation under control. Except for the meeting we just had with our accountant who pointed out our huge tax liability because of the profit that allowed us to build our contingency fund. Now – where do we get the cash for that. D’Oh!

C.