April 14, 2020
As the President assembles a large advisory group to determine how to get the economy going again, the simplicity of the answer is astounding. With all its critics, one thing businesses know how to do is work! Just tell them what the safety regulations are and leave it to them!
No, this is not just a quip. I’m serious. After working with small businesses for well over three decades, with all their problems, one thing they know how to do is work hard.
They already know how to start things, re-start things, hire, solve problems, and create products and services for customers. Mr. President, you and your task force don’t need to do anything but provide money. They will do the rest themselves almost intuitively.
The concept is not new. Adam Smith called it the invisible hand. He described the natural economy of business owners and tradesmen to automatically do what it takes to create products and trade. His book “The Theory of Moral Sentiments,” written way back in 1759, was more of a discovery than a contrived principle. People act in their own and their community’s self-interest. When customers’ needs are met, the businessperson serves the needs and wants of the customer, and serves his own desire to keep a few shekels for investment in the next day. This principle of social economics is based on human behavior and is innate in all successful businesspeople.
So, getting back to work is like riding a bicycle. Once you learn, you can get back on and ride again and again. Let them do it!
Sure, some phasing or restrictions will need to be thought through. But the consideration on the restrictions is all science and probability. We may need to restrict gatherings for a while longer. We may need to wear masks. We may need to take and record our temperature twice a day. Whatever science thinks.
So, determine the distancing guidelines, mask wearing, temperature testing, touching guidelines, and let each business figure out how to implement it just as they do for other safety issues. They already know how to comply with OSHA. If we can deal with OCHA, we can deal with Covid rules.
After all, each business owner must determine if they can make a profit based on the rules imposed on them. Then they will try to innovate to meet the rules. We will have millions of instant innovators on all these fronts once we know what the rules are.
This approach makes so much more sense than getting a commission together to figure out how to restart business. If a commission is such a good idea, let’s have one on how to ride a bicycle too!
Give us the rules and let us decide. It is the power and magic of our free enterprise system. Mr. President, you have done a good job thinking of business during the shutdown, but let us run our businesses, as we know how to do it better than you could ever do from Washington.
Once marketing positioning and a market niche is well understood the products or services are launched, a new business lives or dies based on cash. Just like a bad injury, a cash bleed-out can kill you.
The concept is very simple, but surprisingly this is one of the top reasons otherwise successful businesses die. Worse, it happens when success causes fast growth, just as it happens because you don't have the revenue to cover costs.
The other big surprise for most business people (and their CPA's) is that regular financial statements do not deal with cash flow. Sure if you ask for one, you will typically get a "Statement of Cash Position," which is NOT a cash flow projection even though it is related.
A cash flow forecast is a plan of when cash will come into the business (spendable money) and when you will need to pay for expenses, payroll and taxes. It involves some basic estimates about sales, payments from accounts receivable, accounts payable schedule and various other cash transactions such as loans, paybacks, tax over payments, and cash spending on new assets.
One reason most accountants don't like to do cash flow projections is that they hate to forecast. Accounting is a precise instrument of what happened. It does not naturally like estimates or forecasting.
For most business owners setting up a cash flow plan or forecast should be done by conservative planning; by themselves. Below is a basic start up cash flow plan.
1. Estimate revenue based on the last 6 months of cash receipts from sales. Use a moving average so if you are growing, this will create a trend for sales. If you have no sales experience yet, the forecast will have to come from your niche market planning assumptions.
2. Estimate average expenses for each month to be paid in that month.
2. b If you buy goods to resell, you must calculate an "Open-to-buy" plan*
3. Calculate payroll for the next several months by week
4. Add bank balance for the day you are starting the calculation.
5. Plan when you will pay for extraordinary purchases such as equipment.
Place 1. on the revenue line in a spreadsheet.
Add 4. to this number in the first column
Subtract 2, 3, and 5
This will provide a very basic cash flow plan.
Update this weekly by replacing estimates and forecasts with the real numbers.
Notice if your cash balance is trending down or up; if down, start early to make the changes to each component so you don't run out of cash. Plan to pay all bills on time, faithfully.
* An open-to-buy plan is a forecast on how much inventory you will need to keep your sales growing. Some industries like fashion retailing can require buying 10 months out, so this becomes a big issue if you miss-buy. Since few people know how to do this, many businesses over buy, which puts a huge pressure on paying bills. This results in mark-downs, whcih puts pressure on profits. More on open-to-buy in a future blog post.