The Cash Must Flow

Happy Friday,

Consulting businesses buy time ‘wholesale’ and sell it ‘retail.’ And none have the bottomless well of cash reserves most people imagine. In consulting, everything rides on maintaining a steady, uninterrupted stream of positive cash flow. 

As high-cash-flow machines, a lot of cash flows in and then very quickly flows right back out. The critical difference between the inflow and outflow is its predictability. Outflow (what you spend) is essentially fixed, predictable, and absolute—salaries, rent, insurance. The bell tolls to pay up every two weeks, or people walk.

Inflow, on the other hand, is neither guaranteed nor in the company’s complete control. To make payroll over a year, four critical tasks need to be accomplished consistently with nary a hiccup...ever:

1.     Win work (Backlog) – Consistently enough to cover expenses. 

2.     Do work (Utilization)—The work must be performed at a high enough average utilization rate to pay all current staff and operating expenses. Profitability is highly sensitive to utilization, such that a handful of points can make the difference between bonuses and layoffs.

3.     Issue invoices (WIP)—Every day of delay puts more unreachable, un-spendable ‘dead’ money on the income statement instead of in the bank account, directly reducing accessible cash.

4.     Get Paid (A/R)—If the world were fair, getting paid immediately for work you financed and performed on your client’s behalf wouldn’t be a risk, but it is. I deleted the rant I wrote here because it was too long and sharp-pointed, but it’s saved for another day. Punch line - getting paid requires constant attention and poses a giant, unpredictable threat to cash flow.

People complain that leaders incessantly bang the drum about utilization, billing, and A/R, causing them to believe the true company mission is simply to make money. That's understandable. Considering the costs of reduced employee engagement (which also impacts the 4 above) and the increase in employee turnover, I agree. Openly harping about these results in a net negative impact to the bottom line, having experienced both.

Better, it's the leaders’ burden to monitor and quietly address utilization, billing, and A/R problems directly with those who can change them without taking a wrecking ball to the culture and mission of the whole organization. 

Still, given what's at stake you have to appreciate their concern. Ninety percent of the benefits of positive cash flow go to the employees: a paycheck they can count on, expensive benefits, interesting work, resources to help build careers, retirement account contributions, bonuses...all the result of close monitoring and diligent attention to the four drivers of positive cash flow, the lifeblood of the consulting business.

Hey, have a great weekend!

Dave

Feedback and blowback are always welcome: dave@goodnewsfriday.com

All past topics are still available at @goodnewsfriday.com

Written by me, not ChatGPT, with valuable speed-assist and grammatical enhancements graciously provided by Grammarly.