When I worked for very big companies in management, I never had to worry about making payroll, or paying monthly expenses because big companies have huge credit lines that they use to fund operating expenses. We went from being owned by a Fortune 500 company on a Wednesday, to being Paragon on a Thursday and we made payroll on that Friday in May of 1991. As a result, for the first time in my working life, I had to pay attention to our cash position. We were very fortunate because we not only had money from our leveraged buy-out, we had client receivables (monies owed us) from existing clients. In addition, we were awarded a sizable new account on that very same Friday, so our cash position has always been strong from our very first week in business.
Even so, cash management is a critical aspect of managing any business. Wearing a crown on his head to make the point during numerous company management meetings, our former retired Chief Financial Officer, used to say "Cash Is King", which was particularly true when interest rates were higher and we were generating substantial returns, referred to as yield, on our money in the bank. Today, with historically low interest rates, this is not a big part of our revenue stream; but the day will come again when interest rates rise, so the premise is still valid.
During our first few years in business, when we were trying to preserve cash and we had no credit lines because we could not get bank approval, we used long term leases to buy furniture and equipment, at very high interest rates. Thankfully, those days are long gone as today we have credit lines that we rarely use to fund operating expenses. Fortunately, for the most part, we are able to fund our business from our own cash on hand in the bank. As a mortgage banker, we do use credit lines, as a normal procedure, to fund our mortgage originations.
Otherwise, we run a very tight ship where Cash Is King. Most important, we have no sizable debt, which allowed us to work through the recent Recession in a solid financial position. My thinking is always plan for the worst and if better things happen, the company will just be that much further ahead. While many companies in our industry have come and gone in the last 20 years, we are still standing, so perhaps my management philosophy makes sense.
As a lesson along the way, we have had a few clients that just didn't pay their bills on time. One client with annual revenues of $2 Billion, years ago when confronted with this problem, explained that every one knew that companies that were part of the auto industry never pay their bills on time. By the way, that is not true since today we have clients in the auto industry that do pay their bills on time. Since we had very high receivables with this particular client, we had to go postal to get our money. We then terminated our agreement encouraging the client to work with one of our competitors. They ultimately chose to do business with a competitor that at the time was owned by none other than General Motors, so perhaps they understood each other's business practices better.
The reality is that there are some clients in the marketplace that ignore contractual requirements and intentional delay payments to gain the "float" on their money at the expense of the supplier. While this may be a legitimate strategy, I see it as dishonest and therefore, we walk away from these clients. In business, you have to know when to hold them and when to fold them. A client that intentionally does not pay their bills on time is not a client worth having.
And, then there are the clients that are not profitable. At some point, this too must be confronted as a serious problem. If it is impossible to renegotiate a contract so that the business is profitable, it is time to walk away and we have. In one particular case, with a big high tech client, we tried for over a year to renegotiate our expiring agreement because we were losing money on every transaction we took. For that year, we operated with no contract in place. Finally, we gave the client notice that we were done.
The Vice President of Human Resources called yelling and screaming at me for "abruptly" walking away from their business. I told her that we tried everything possible to establish a constructive relationship for over a year to no avail and that we could not continue taking business at a loss. This particular client has a reputation in the market place for abusing suppliers. Since my Mama didn't raise no fool, I knew it was time to walk away and let a competitor have this client.
Cash Is King. The President and CEO of every company must be involved in managing cash on hand as a critical priority. Sometimes it involves tough decisions related to client receivables and client profitability. Business that does not generate profit is charity and while we give a lot of money to various charities, we are not a charity. Profitablity is a key indicator of success and obviously is the basis for staying in business in a free market economy.
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