There’s an old adage in commerce that says, “Customer is king” and although I have found that resonates with all types of entities, I’ve come to realize there’s another card in the deck that trumps the customer and that is another phrase beginning with the letter “C” — cash flow. I believe “Cash flow is king”—see, without sufficient cash flow we won’t have an organization to be able to serve any customers at all.
Join me on a quick field trip down accounting alley to remind ourselves of the three types, (or activities) of cash flow — operating, investing and financing.
Operating activities are what we do. Because of what an organization does it has cash coming in due to what it sells and cash going out to pay for the costs it incurs to do what it does. We always need to ensure our operating activity cash flow is positive — meaning we have more coming than going out.
Organizations can choose to invest in items that have nothing at all to do with their core operating purpose and so, when they buy those investments there’s an outflow of cash and when they sell those investments there’s an inflow of cash. Wouldn’t you agree with me that a negative cash flow from investing activities is not necessarily a bad thing? Why? Well, the organization may have purchased something it will sell in the future, hopefully at a higher price.
Finally, there are two types of financing activities available to all businesses — debt and equity. When an entity borrows money there’s an inflow of cash and when it pays down debt, there’s an outflow of cash. If a corporation buys back stock from existing shareholders there’s an outflow of cash and when it sells its own stock, (called treasury stock) there’s an inflow of cash. A negative cash flow from financing activities is not necessarily a bad thing, either — why? Well, a company may have paid down debt and/or just completed a stock buyback, which generally is viewed favorably by investors.
I recently watched a fascinating documentary about Tower Records, which serves as a superb case study to amplify the importance of cash flow.
In 1960, Russell Solomon opened the first Tower Records store on Broadway, in Sacramento. He named it after his father’s drugstore, which shared a building and name with the Tower Theatre, where Solomon first started selling records. From 1960 until 2006, Tower operated retail stores, which closed when Tower Records filed for bankruptcy and liquidation.
Tower Records entered Chapter 11 bankruptcy for the first time in 2004. Factors cited were the heavy debt incurred during its aggressive expansion in the 1990s, growing competition from mass discounters and Internet piracy. Mismanagement, managerial incompetence, and crippling restrictions from the first bankruptcy deal also contributed to Tower’s demise.
The marketing mantra of Tower Records had been: “No music, no life” and sadly, that record was smashed by a new mantra: “No cash flow, no business.” If only Russell would have taken more time to understand the principles on which his father’s business had stood for nearly 30 years before he, himself launched Tower Records. Principles such as: moderation; frugality and living within your means would have served the son just like they had the father for decades earlier.
My observation about human behavior in business leadership is that if one leads a prudent and sensible personal life, they’re more likely to lead a prudent and sensible business life. Conversely, if someone’s personal financial management and habits are a disaster, the worst thing that they can do for themselves and others is to start a business. We don’t break principles — we break ourselves against them if we don’t align our perceptions and behaviors with the principle.
In conclusion, cash flow is the lifeblood — the oxygen supply of a business that enables it to serve its customers. In the case of Tower Records, their lust for rapid expansion and their reluctance to manage matters prudently resulted in them having no customers to serve. Sadly, a lack of positive cash flow closed the doors behind the very last customer.
Paul Butler is a Santa Clarita resident and a client partner with Newleaf Training and Development of Valencia (newleaftd.com). For questions or comments, email Butler at [email protected].
