Money management and costs 2/2
Cash flow aphorisms
Welcome to this new issue of The Systematic Venture.
Let's talk turkey, I mean real turkey.
Let's talk about the sinew of war, the oxygen of your business, what can make kings or defeat empires: cash. You know the adage, cash is king.
But let's not talk about it like we are in your cash-flow management MBA course; let's make it more like a few aphorisms grandma could understand.
Avoid businesses with no upfront payments; look for opportunities where your client has skin in the game in the form of cash.
Strongly incentivize yearly subscriptions at the beginning; this cash will save you.
Everything is negotiable.
Ask your bank for every hidden debit, bankers are often crooks.
Decrease your fixed costs to the farthest lower bound possible.
Don’t have an office if you don’t need one.
Early employees, your small team of pirates, should work on their own old-school broken laptops (I still have my old-school broken laptop…).
Look for an office smaller than your need.
Zero perks; attract believers, not fluffy spoiled kids.
Don’t store inventory.
Don’t develop based on your predictions; develop based on your clients' needs.
Frugality as a core value, zero useless expenses.
Implement aggressive invoicing the first five days of the month, and negotiate with your providers to always pay the last ten days.
Dissect every single offer you have, and look for unexplored margin: you probably can sell it more expensive.
If you already have clients, see who are the bad payers. Implement aggressive filtering and potentially get rid of the worst of them. It will harm your revenues in the short term but improve your cash flow in the long term.
Sell something they really need, and don’t be the last provider to be paid.
Avoid compounding costs like the plague: compounding interests, compounding fees.
If your company is leveraged and generates insufficient cash flow, make sure you have fat margins on what you are selling. Otherwise, your investments may just be dramatically increasing your cost of acquisition and your cash-flow/leverage ratio will shrink. In practice, your ability to cover your debt will become unlikely, and your company will go bust. You will die, alone, forgotten, shamed by VC-backed spoiled crying babies1 who don’t fear the same destiny because they can’t lose cash as they never invested a penny.
Honor your payments to providers, but choose them carefully so you can ask for delay when cash flow is tense. One is actually a consequence of the other.
Analyze every single investment in light of potential net cash flow, not using potential gross revenues. If some dude at your company tells you growth is fine even though it generates negative cash flow, throw a lightning hook right to his chin. Knock’em the fuck out, and send his resume to WeWork.
Strongly enforce credit policies; a bad payer can cause horrible cumulative cash flow losses over time. Don’t get blurred by potential rewards while you will just actually pay for that client's presence in the portfolio.
Prioritize cash reserve over low-margin growth in the short term, invest boldly in the long term. Cash makes you able to act fast when everybody is stuck in the mud. In bear markets - when VC-backed companies suffer - you can acquire assets and invest in marketing at great discounts2.
Be on the good side of compounding, and let your cash compound if you can (you can’t, I can’t either but… sooner rather than later).
Keep, if you can, a margin of safety. If you are VC-backed, act considering massive crises are very likely events, and that your investors may be suckers with no skin in the game, willing to see growth to sell equity to a greater fool. Keep four years of runway in a bullish market, six in a bearish one. If that sounds stupid, read about history of crashes.
If you sign contracts in a historically volatile currency, consider opening a multi-currency account and stacking your chips in dollars. You don’t want to see your dollar-indexed bank account value shrink by 20% overnight.
Watch out for your cost of acquisition; it’s often a terrible hidden cost.
If you have no referral strategy or organic growth, you’d better find a way to have one.
Don’t invest in cash-eating assets.
Prioritize business with businesses that have been around for twenty years rather than young shiny startups: know the Lindy effect.
Play the long-term game.
Don’t let taxes surprise you; always make sure you have provisions for taxes and separate accounts. If you are cash flow positive, make sure as much cash is coming to the business as possible.
Watch your fucking costs; business is about being consistently alive, not about shining.
Usually blaming macro-economic conditions rather than themselves. Reminder that the taqueria at the corner has been thee since thirty years and saw it all, but your VC-backed average Joe can’t deal with one bearish market.
Read about Charlie Munger