Cash Flow vs Cash Suck

There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this new series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!

CapForge Founder and Owner Matt Remuzzi reacts to business advice being shared on the internet. In this video, he reacts to cash flow problems.

Video Transcript: 

Business Advice Video:

The number one reason businesses fail, cash flow problems. Here’s three ways to make that not happen to you. Remember this framework, cash flow vs. cash suck. First is get paid first, then provide your service. Don’t provide the service and then pay. The difference is if you own a landscape business, you want to get the money before you mow the lawn. That’s oddly kind of rare. It’s a recipe for disaster if you have to then collect payments and people don’t pay you. The second is reoccurring revenue. Get one client to pay you continuously over time. Most small businesses do not have subscription models. They do not have multi-month and multi-year payment models. You are going to be different because that makes your life a lot harder. Three is a diversified client base. If you have 1, 2, 10 big clients and you lose a few, you’re in trouble when they leave. My rule is no single customer makes up more than 15% of the revenue of any business. So get paid first. Make reoccurring revenue. Diversify your client base. That’s how you build a business. That’s a cash-flow business. Not a cash suck Business.

Matt’s Reaction:

Yes, those are all good tips on managing things. I would say cash flow is not necessarily the main reason that small businesses don’t work. If cash isn’t coming in that’s definitely a problem but it’s not necessarily because of how you collect cash. It may be more of a problem that you’re not a good fit for what you’re trying to sell. Your product isn’t a good fit for the market, your service isn’t differentiated enough, not having customers who even wanna pay you is a reason I think a lot of customers or a lot of small businesses don’t work out. Not because how they collect the money. 

That said her points are valid if you can collect upfront, get the money first, and then pay later, it’s a much easier business to run than where you have to put the money out and then hopefully get paid later. As an example when I had a catering business, we took deposits up front to reserve the time and we got paid in full before the event happened. Then once the event happened I would have vendor bills for my food suppliers that were anywhere from a week to three weeks later and payroll was on a two-week cycle. So generally people were getting paid one to two weeks after the event. So in other words, I got 100% of the money for the event upfront and I didn’t pay any of it out until after the event had already happened, which is a great way to do business. 

On the flip side if you’re doing let’s say commercial HVAC, those projects want you to get started right away. They want you to put people on site, they want you to purchase equipment, put it on the roof, and start doing work long before they pay you anything. So in order to grow that business you gotta have a lot of money because the more jobs you take the more money you’re out before you’ve even gotten paid. If you were to land two or three big jobs, right, at the same time you could be out hundreds of thousands of dollars before getting paid and collecting anything and sometimes those customers run into financial trouble themselves or even declare bankruptcy. And now you’re out whatever that job cost you and you collected little or nothing on it so the timing of payments in business is definitely consideration. 

If you haven’t started any business yet then when you think about what business you wanna start one of the things to think about is when do I get paid and then are there recurring payments or is each customer a one-off. And then also how many customers are there if you have one big customer like she said and they leave you got problems. If you got hundreds of thousands of customers then you’re in much better shape if one or two leave that’s not gonna destroy the business. So valid points for sure and something to think about.