The challenges of managing Cash Flow

Anthony Perl: David, I wanted to speak to you about this idea of cash is king. Um, talk to me about that concept and cash flow, because I think these are terms that are used quite often, but not necessarily the business owners have their head quite around what it actually means when you say cash is king.

David Patterson: Yeah, it's an interesting one because, I mean, cash, cash is king as it is, like I said, it's a terminology that gets thrown around a lot, um, but ultimately, the whole point of it, I think, is that, is that cash allows you to do, cash is the thing that allows you to do the things that you want to do, um, profit, profitability in a business, uh, uh, doesn't necessarily allow you to do the things that you want to do.

Um, so I think the focus on cash and cash flow needs to become important as far as, um, you know, timing of when people pay you, when you pay your own bills, um, getting a feel for a projection of, of cash and when cash is coming in. Because ultimately without it, you're not going to be able to do the things that you want to do.

Anthony Perl: Yeah, and I think, but I think there is this balance isn't there as well, is that it's not just as simple as going, looking in your bank account, how much is there and, uh, right, there's, uh, there's a thousand dollars in there. I can go and spend it. It doesn't work.

David Patterson: Oh, a hundred percent. And it's, it's interesting.

I actually had a conversation with a client the other day and they'd been looking, uh, they'd been looking at their profit and loss for the month before and their profit and loss. Again, potentially not the best recording system that they were using, but their profit and loss was showing a 20, 000 profit for the month.

And they were thinking, wow, this is fantastic. Until you had a look at the fact that, that the, the reason they made a 20, 000 profit is because they hadn't paid some of their bills. So it's important to have a full understanding of, of what money's coming in and what money has to be going out. rather than just looking at your bank account because if you haven't paid your bills you might have a large amount of money in your bank, uh, but it's kind of already allocated to or should be allocated to other expenses and not to your own, uh, personal enjoyment.

Um, so it's important to get a full understanding of, of, of what you owe as well as what you've paid for.

Anthony Perl: And I suppose one of the challenges as well in doing that is recognizing that, um, you might be sitting in your in tray and say, I've only got one bill outstanding and it's only for a hundred dollars, but it's the people that haven't sent the invoices yet sometimes as well, because you can't rely on everyone being instant in what they've got to send through.

David Patterson: Oh no. And the number of times you see. invoices from people that have done work for you coming in, you know, two, three, four, five months later, uh, is, is staggering because it, it, two reasons, one from the, their perspective, you wonder how they can manage their own cashflow if they're sending bills out five or six months late.

But for the, for our clients, you know, it, it, it becomes really difficult when a bill comes out of the blue, um, that you. almost had forgotten about or hadn't been factoring in. So it's, it's, it is important to keep a eye on, on what should be coming in. Absolutely.

Anthony Perl: Yeah. I mean, I think that also means regular check ins, doesn't it?

In terms of understanding where anyone is up to at any given point in time.

David Patterson: Absolutely. Absolutely. Which is why it's important to make sure that your bookkeeping is, is constantly up to date and, and, and. You know to the last minute because it it's in it can be Your cash flow can blow out of the water in a heartbeat if you're not Keeping on top of it.

Um, and once you can once your cash flow becomes Sort of difficult it then becomes really really hard to catch it back up again and get back in front You know, you you've almost got to work twice as hard to get back to where you were um so the more you can keep on top of those things and the more you can monitor them and You Um, and chase up money that's owed to you, uh, and chase up, even chasing up bills that you know have to be coming in and just harass them to say, look, I just need to know how much I have to pay so that I can factor it into my business, my business and cashflow.

Um, so yeah, it's, it's, it's, I mean, it's a strange concept to ask for bills to be sent to you, but it gives you a greater picture of, of what liabilities you've got.

Anthony Perl: Yeah. Uh, and I suppose you, You have also, I imagine also over the years that you've got lots of stories of people that have come in that have had absolutely no, uh, visibility on what's coming and going through to those that I imagine are a bit more efficient in, in that.

How difficult is it, um, when you've seen, you see dealing with a business? And they've come in and things are really a long way behind because I imagine there's plenty of people sitting out there listening at the moment going, yeah, we're probably in that bucket of people who, uh, haven't been really granular in what they're doing.

David Patterson: Yeah, absolutely. The, um, well, I had a meeting with a client just yesterday about this and they were really stressing. The fact that they had all these unpaid bills. But the problem that they had was that they didn't know how much those unpaid bills were. They just knew that collectively there were some here, there were some there.

And I said, you've just got to get to a point where you know 100 percent what is outstanding. And yes, it might be a scary number, it might be daunting, but it's better to know it than, than stress about the unknown. Once you know what that figure is, We can factor that in. So we can factor that into the performance of the business over the next 12 months and say, okay, well, we need to, we need to increase sales.

We need to review our costs. We need to, whatever it is that we need to do, increase our prices, knowing that we've got to factor in. Not only do we have to keep up with our current bills, but we've got this backlog that we can just chip away at. And I think the important thing, once you get into that position of Being a little bit behind on your cash flow is to make sure that you maintain communication with your suppliers to say, hey, You know, we're still here, we're still working away and we're just going to chip away at this bill so that they know what's happening as well.

Anthony Perl: Many of the businesses that you're dealing with are family type businesses, they're, they're smaller businesses, uh, and there'd be plenty sitting out there and listening to it and going, yeah, I think we're on top of the bills for the business, but it's what's happening in the family as well. That is just as important, isn't it?

David Patterson: Oh, absolutely. And one of the things that you hear a lot with business owners is Uh, when you tell them that they've made a profit of 100, 000, let's say, uh, and, and one of the first things they will comment on is, is we can't have made that much money because I, I don't have it in the bank and we don't spend that much money.

We don't have a lavish lifestyle. Um, I don't understand how we could have made that much money, but we haven't got it. Uh, so that's where it becomes important to. This understand and have a budget for your personal expenditure to know where you are spending your money. Um, because these days, I mean, I'm not sure how you pay for things Anthony, but I do everything on my phone.

So if I go for coffees, I tap my phone. If I, you know, go to Harvey Norman's to buy something, I'll tap my phone. I don't, which is terrible, but I don't really pay attention at the time as to how much I'm spending. So, quite quickly, you can Where your money's going can just get out of hand and you just don't quite realize until and no one likes doing this.

It's one of the, it's one of the hardest things to get business owners to do is to do an analysis of their own personal spending. Uh, I don't know whether there's a guilt thing or it's just really, really difficult to get them down into that level to find out what they're spending money on because there's, there's a lot of money spent on items that are not necessarily.

I guess. Um, and, and this, just to go back to the personal goals, the personal goals can help people get a grip on themselves. So if they're, take coffees for example, if you're buying a couple of coffees a day, um, and you're spending 10, there's 50 a week, say, during the week, uh, over the year that adds up to a lot of, a lot of money.

That's going to potentially have an impact on you being able to take a holiday overseas. And that, you just then have to work out what's, more important to you, the coffees as you go along, or the trip at the end of the year.

Anthony Perl: Yeah, I know exactly what you're talking about. I had a family that I know, this is a few years ago now, that did exactly that, that they had a goal of going on a family holiday.

Uh, I think it was two or three years that it took them working towards it and they sacrificed lots of those things along the way, knowing full well that that's where the spend was going to go. Always admired their ability to be able to do that. Tried that conversation with my kids, yeah, but it's only once, can we just get the takeaway?

Can we just do this? Can we just do that? Uh, you know, it's, it is a, it's a really difficult thing because we don't really teach that to our children. Do we not? Certainly not in school. Yeah. Absolutely.

David Patterson: Oh no, and it's one of the, and especially I think, you know, now that now that um, cash is not that readily used and getting back to the tapping on the phone.

I think the kids now don't. actually see that it's costing money. You know, if you pay, if you're not paying with, with like folding cash, you kind of lose, lose the, uh, lose the impact of how much things are costing. So the takeaway for a family could be, you know, 30, 40, 80, a hundred dollars for, for takeaway, but because they don't see that money going out, it's hard to, it's hard to link the two together.

Um, and it's certainly, I think, It's an area of education that's, that's lacking extremely, you know, which has never been there. I mean, even when you're going to school, you know, you didn't have that, um, kind of real world education that, that, that you need to get at some stage.

Anthony Perl: Yes. And I think that's, it's such an important point, isn't it?

That you're making there, that, uh, getting that experience and working with it and, and understanding because the money, as you say, With the tap of the phone doesn't feel like it's there. And particularly for this younger generation that aren't seeing it, it's one thing when they get old enough and they've got their own bank account.

And at least then there are apps that you can see, okay, the money's going down, but when you're younger and mom and dad are paying for everything, it's, it's a bit. trickier because they're not really seeing anything going out. And I think that's, that's one of the dangers in this sort of whole idea that we're going to be completely, uh, in a cashless economy.

I don't know whether that's something that is a good thing or a bad thing.

David Patterson: Yeah, I mean, my initial thought is that it's not a good thing, but I think the other side of it is, as long as we can get some, um, Uh, education and understanding and maybe a bit more, a bit more work behind reviewing your, your, what you're spending.

So, so going completely cashless, probably creates a more importance to have an understanding of your own personal budget. And maybe it's a case of, I mean, I've got a client who, who sets effectively sets a budget for their kids. Um, now, and they're, they're sort of 10 and 12 around about that age, um, so, so she gives them pocket money of X amount of dollars and it's up to them, you know, so they can spend it on whatever they want, but once the money's gone, it's gone.

So they're learning the lesson that, okay, if we get, I don't know what their pocket money is, but let's say it's 50, if they spend it on Monday, then they've got Tuesday through Sunday where they can't buy anything. And so they've just got to, that's their sacrifice. So they're starting to learn that and starting to question whether they need the thing that they're about to purchase or, or, or not.

And so I think as long as that kind of education comes in at the same time, it's going to be okay. But without it, I think there could be some serious, um, issues down the track.

Anthony Perl: And is that something that you, you know, suggest having conversations with Um, your kids with parents actually being a little bit more active in doing that.

Is there, is there a particular formula that you can drive that with kids? I suppose there are different ages where you're going to be able to do that. It's, you know, there was, there were days when, um, I suppose you and I are a little bit older and so you probably got, you know, 50 cents or a dollar for the, uh, the pocket money.

Uh, not, not the 50. 50 would have won a lot of lollies in those days. It certainly would have. Um, but, but it's how do you actually get parents to implement those things because it does have a flow on effect.

David Patterson: Oh, absolutely it does. And I think the earlier you can do it, the better off you are. But, but I also think that if you're working around your personal goals as a family, so you're deciding about what's important between all of you, about what you want to be doing over the next 12 months, two years, um, or six months, say with if kids are younger, then you can start to tie their spending back to what it is that they want to do.

And, and get them to start to question whether it, what they're, what they're feeling is essential at the time. Is it really essential? You know, is it, is it really essential, younger kids to go and buy that, I don't know what young kids buy now, but you know, whatever it is, uh, is that important? And would you rather that than, and miss out on, on a new bike in six months time?

So, so it's just starting to get them thinking from an early age, um, about their goals and And effectively budgeting to, to make sure that they achieve them.

Anthony Perl: Absolutely. And, uh, but I, I suppose on the flip side of that, um, as you start delving into businesses, I bet you have a few stories about, um, where people are spending their money and, and been a bit shocked about how much they're spending on certain things.

And maybe even the, you know, the families and the people have been equally shocked when they've realized how much they're spending on certain things.

David Patterson: Oh, absolutely. And I think that's why I think that's why a lot of them have a reluctance to actually dig in and and work out what they're spending their money on because in a lot of and I think there's, there's potentially also an element of a form of guilt attached to it as well because they're, you know, they don't want to be seen to be Um, it's, it's very much an eye opener, uh, for a lot of people to be spending lavishly and so their thought, they, they build into their mind that they're not big spenders, they don't spend a lot of money on things that they shouldn't be, well not shouldn't be, but on, on luxury items, they don't, they're not doing that, but when you start to break it down, it, the level of shock that a lot of people have when they suddenly go, wow, we, we actually do spend a lot of money on that, or we do spend a lot of money on that, um, it's, it's very much an eye opener, uh, for a lot of people.

That they've never had to do before, you know, so that could have been, we could be talking about people in their 40s and 50s who have never actually sat down and analyzed their spending and they suddenly realize all the money they're spending on entertainment or all the money they're spending on, um, going out, um, whatever the clothes, um, and it's not to say they can't do that.

I mean, I'm not, I'm not here to sort of say you've got to scrimp and save and not do those things, but I think it's with an understanding of, of, you know, The bigger picture and how that can impact on, on, on the bigger things in life.

Anthony Perl: Yes, because we do live in a world where, um, this concept of set and forget, uh, is employed by many businesses.

Um, you know, various pay TV type scenarios, uh, music online, all of those ones where you agree to terms and conditions. And. Suddenly you're paying and those, those add up.

David Patterson: Absolutely. They do. And I might, if I just look at ours, you know, we've got Spotify, Stan, Netflix, Disney, and there's probably a couple that I'm missing that, that we do as well.

And because they're all only, you know, 15, 20 a month, you tend not to think about them too much. But when you, when you then sit down and go, hang on, that 15 20 a month is actually 120 a month. That's a thousand, You know, 1, 200 bucks a year suddenly becomes a lot of money and you then start to go, well, hang on, we, we've only, we only ever watched Disney once a month.

Do we, you know, do we need to, to do it? And I think it's, it gets back to that thing because you're not actually having to pay for it because it just comes out of your bank account automatically. You tend to, like you say, forget about it and, uh, don't think again of it. Um, but if you sit down and review and analyze it, then you, then you'll get an understanding.

And I think that's the main thing to have is an understanding of where your money's going. Um, you might be happy with how, where your money's going and that's fine, but at least there's no surprises.

Anthony Perl: And I think the other thing just to sort of wrap up this conversation is to ask about time of life consideration because, you know, goals change, right?

And, and, um, you know, kids get older, you get older. Um, it's, it's not a case of just doing this once is that you have to keep reevaluating.

David Patterson: Oh, this is a, this process is a continual process all the way through, um, till the end effectively. So you're right, I mean, goals, not only do goals change, but you achieve goals.

So you know, you, you need to tick off a list, tick off an item off the list, and then you sit down maybe at the end of the year and go, okay, what else do we want 12 months or 5, 10, 15 years? Um, And time of life, I think, is another important thing to understand that there are certain things that you can do at certain times of life.

So if one of your goals is to bungee jump or jump out of a plane, not that it can't be done at an older age, but those sort of things, those more high intensity things. highly active activities, probably better done when you're younger, when you, when you're fitter and can actually enjoy doing them. If it's a long trek, if it's a, uh, you know, going to base camp at Everest, probably better to tack that in when you're a younger age rather than what leaving it to you sort of in your 70s and 80s.

Again, not saying you can't do it 80s, but I would imagine it's easier in your, you know, 20s, 30s, 40s, 50s. So it's, it's about understanding the things that you are capable of doing at different ages.

Anthony Perl: I'm in my 50s. I'm not going to base camp now, uh, in the future. And I'm not sure that I would ever intended to have done it.

In the past either, but, uh, but you know, absolutely a really important point there for, uh, people to understand that it is a, a reevaluation process. That this isn't something that you can just do. And I think we don't realise that necessarily as much, you know, um, that parents suddenly kids grow older and, and things, their demands change.

And your demands change.

David Patterson: Mm-Hmm, , absolutely. And we're in that position at the minute, Anthony, sorry. We're in that position at the minute. Our kids have all got through high school and they're all. Off into the wild world doing their own thing, which, which then frees up, not frees up our time, but allows my wife and I to, uh, consider other things on our list that we wouldn't have considered while the, while we still had the kids and while the kids were growing up.

So our kind of focus has changed a lot in the last couple of years. Um, based on the fact that the kids are now older and more independent.