2024 was challenging for many professional services firms, but those that optimized cash flow are now better positioned for 2025. Join this session to uncover the root causes of poor cash flow management and learn how operational factors impact cash flow. Gain insights on weekly cash flow management and aligning it with KPIs. Leave with actionable strategies to optimize cash flow and strengthen your firm’s resilience.
TRANSCRIPT
Greg Alexander: Hey, everybody. This is Greg Alexander, founder of Collective 54. And you’re listening to the Pro Serve Podcast. This is a podcast dedicated to founders of boutique professional services firms. So if you’re in the expertise business, let’s say consulting, financial services, IT services, etc., somebody that provides expertise for a living, this is for you. And on this show, we talk about how to make more money, how to make scaling easier because it’s way too hard, and how to get to an exit at some point, making an exit achievable.
Greg Alexander: We recently had our annual conference called the Founders Summit in the beautiful Drover Hotel, in Fort Worth, Texas. After a long day of education, my friend Ken Yeager and I stumbled into the backyard, and we were wrapping our teeth around a few cold beverages. We got into the conversation of cash flow management. I was picking Ken’s brain because he’s an expert in this area. I was telling him that 2024 was not a good year for many of our members, and many of them were struggling with cash flow, and that was preventing them from investing in their business. We got into a really interesting conversation, and I said, “Hey, let’s hit stop here because I want to turn the recording device on and have you come and share what you’re sharing with me to the broader audience.” So that’s what we’re going to do today. We’re going to talk about cash flow management, the implications of poor cash flow management, what to do about it, etc.
Greg Alexander: So with that, let me bring in the guest, Ken Yeager, who is a long, well-respected member of Collective 54. Ken, it’s good to see you. Please introduce yourself to the audience.
Ken Yager: Thank you, Greg. Hi, this is Ken Yeager. I’m founder and president of New Point Advisors Corporation. We are a boutique advisory firm, trying to scale just like everyone else, and we are in the business of doing turnaround management and cash flow coaching for smaller businesses. Call them 5 to 50 million dollars in revenue.
Greg Alexander: Okay, so I’m gonna start off with the basics, which is, why do small businesses struggle with such a basic thing like cash flow management?
Ken Yager: Great question. So everyone understands what cash is. You can go look at your bank account and say, “Okay, I’ve got cash in there,” but cash flow is actually an exercise in understanding the multiple dimensions of functions of the operations of your business and how it impacts cash. This is not something they teach you in MBA school. This is not something you end up learning on the streets. When you do something, how does it affect cash? And it gets to be complicated. The bigger you get, the more complicated the story is, and that’s where it starts to fall down for our entrepreneurial friends.
Greg Alexander: Yeah. So, I mean, simply cash flow is how much you’re taking in and how much is going out. It doesn’t seem that complicated to me. But our members are struggling with it, so get into it in more detail and tell me why it’s way more complicated than my overly simplified definition.
Ken Yager: Absolutely. Well, you know, Greg, it is just that simple. It is cash flow in, cash flow out. However, a couple of things happen along the way. So in the individual day, we don’t have a dollar that showed up and a dollar that went out. We have lots of dollars that come in from different people. That money came in because of different activities that we created, some of them just yesterday, and the money came in for a deposit for a new project. Some of it was a monthly or quarterly payment that came in on a project we were working on, and some of it is that receivable that we have been kicking and screaming for months, trying to get that customer to pay for us. That payment might have actually come as a discount because we gave something away to get the money in. So now we’ve got all this money coming in all kinds of different forms and ways and reasons, and each of those impacting what we can do as an operation and what we can afford to do as entrepreneurs trying to scale.
Greg Alexander: Okay. So you and I were talking, and then a bunch of members were listening to our conversation, and they walked over and started asking some questions. I took some notes in my phone. So I’m looking at my phone right now, and I’m gonna ask you the questions that they asked you that night, but for the broader audience. Why is it so difficult to forecast cash flow?
Ken Yager: So cash flow forecasting. Now we’re talking about reading the future, right? This is a scary place. None of us knows what’s going to really happen tomorrow, even if we have long tail contracts with some government agency that just sends us checks. Even that forecast is difficult. And again, there’s 2 sides. We’ll stick to the revenue side for a second, because we said the word forecast. We’re going to talk about how to get the sales thing out there. So when you do that forecasting, you’re trying to measure out in the future. And if you’re going to do it in a way that makes sense for a business, you’re going to do it inside what we call a revenue cycle, which is, how long does it take you to win a service, do a service, and get paid for that service? Generally accepted principles or just concepts? Is that gonna take us 90 days out. 3 months. 12 to 13 weeks. That’s a long time out. Now we get a lot of undulations. Right now, we have a lot of projects that are moving and a lot of different things that are happening. Do we really know when that customer is going to pay us? Do we really understand? Like, if we come to a holiday and we have a payroll on Friday, but this past week was the week where our clients were on vacation, and Gladys in bookkeeping and accounts payable doesn’t cut the checks when she’s out of office. So the checks coming next week. So now it starts to get really kind of funky about that forecast of collections, not to mention the sales part where you’ve got professional salespeople out closing deals left and right. And are they pushing for that close? Do they really have it on a clock, or are they just going to close it when they close it? And that becomes a big conversation that starts in sales. I mean, just in this one sentence, we’ve just talked about the sales team, and we’re talking about accounts payable. And that’s all just on this side of the revenue. It gets a little complicated. So it’s hard. That’s why it’s hard to forecast.
Greg Alexander: Alright. So now it’s so hard to forecast revenue, for all the reasons that you just mentioned, plus a thousand other ones. It should be easy to forecast expenses, though, shouldn’t it?
Ken Yager: Well, you know, we’re really fortunate here in the freight train of professional services, where the payroll comes up every week, and every other 2 weeks or every 15 days. If you’re so lucky. Yeah, that part’s really easy to forecast, because we’re mostly payroll, and that’s fine. So that’s that really high barrier that we’re all trying to manage to. It feels a bit like some peloton sprint right when we’re trying to keep up with the instructor. Here it comes again. You know, we’re gonna we’re all getting up on our cycles, and we’re going to go for a high RPM rate again. Try to get those collections in. So that’s the expense side there is really easy to manage. Let’s say, if we’re in the we’ll call it this. I like to call it the growth stage. I like to call it the survival stage. Then we get to scale stage. Now, we’ve got just like all the other members of the collective 54. We have all these specialties we can come to you with and say, Oh, you know, just for a few thousand here, 10,000 there, or some of the big guys big money. We can get you a scaling operation. So now I’m paying for infrastructure, you know, and I got payroll and infrastructure. So that gets a little crazy. And then I get to the exit side of this business and we get into some of the fine art of proving that you can create cash, and we’ll come back to that because that’s another big unpack that we can go to. But those are the big things which wheels are turning at growth and at, you know, scale stage starts to impact. You know what we can do. And really the cash that’s in our hand.
Greg Alexander: So one of the reasons why our members struggle with this is how lumpy the business is. You know, there’s great variation in project size, timeliness of payment, demand, you know, sometimes demand is really good, and we’re running 120% utilization. And then all of a sudden, which happened in 2024, demand dried up. And we’re down to 50% utilization like, it’s very, very lumpy. So matching, looking out 13 weeks, as you mentioned, 90 days, 3 months. Matching revenue to expenses is really hard, and I don’t know that there’s anything that our members can do about that, because they’re in the marketplace. And that’s the way the marketplace is behaving. So in that environment where the top line is going to be less predictable and very lumpy, what are 2 or 3 practical things that somebody could do to deal with that?
Ken Yager: All right. So I’m going to put a little of my turnaround hat on, too, to get through this, because our members are suffering from kind of we’ll call it not short term liquidity issues, but some long term strategic issues that are coming market issues that are coming at them. The first thing is, stop hiring. All right. So look if you can see that something’s not happening, stop, you’ll turn the wheel off, so that’s an easy one for everybody. Then the next piece that I’m going to talk about. Really, we’re getting into the I like to say, this is something we talk about in the turnaround spaces. Never let a good tragedy go to waste. So there are times when you’ve been growing your business, and you watch your team growing with you and some people are, you know. Alice is keeping up with you. But Bob’s not really keeping up with you. This is a great time to call the herd to help show the spirited animals who are believing in the mission, who drank the Kool-aid, or driving this bus to the moon, that they get a place at the table, and those who don’t probably like Bob don’t fit, and they should go find another place where they actually do fit well, and don’t feel bad about letting them go. Surely been with you for 10 years, or even 20 years for some of our members, but they’ve run their course, and it’s time for you and your mission and what you’re trying to accomplish to make that change. And it’s hard. I’m making a real simple sentence here. It’s brutal. I face it, too, in my own organization. But you’ve got to make those changes, and don’t. When that pressure’s on you for cash, don’t sit around and say, it’s going to come back tomorrow.
Greg Alexander: Yeah, right? You know, our members as entrepreneurs have a high risk tolerance. So I’m gonna give you a use case here. And I want you to maybe pour some cold water on our face. So the use case is. I’ve got a great team. They’ve been with me for a while. They’re trained. Their cultural fits, you know. They’re the way we succeed. All of a sudden business gets soft. Some deals that I thought were going to happen don’t happen. And you know, I’m running at 50% utilization. Let’s just say to pick a number. Now in a manufacturing business, you would cut 50% of the manufacturing capacity to, you know, rationalize supply and demand and services. Our entrepreneurs don’t do that. What they do instead is they cut their own Comp. And they hold on. And they say, you know. things are going to return. These people on my payroll are really difficult to replace. So I’m just going to wait and wait and wait and wait. And then one day they wake up and things got really bad because they waited too long. So what do you say to somebody in that situation.
Ken Yager: All right. So we’re since we are talking about someone who is like in the game and is trying to make this thing win. We’re trying to get. We’re trying to move to survival mode. We’re trying to move to the survival mode for you, the owner and your mission. And so we need to make sure that you come up with a way to hold on to that that concept, those customers, because that’s all that’s going to matter. The team you have can be reassembled later. We can rebuild one thing we learned in Collective 54. See it all the time and really drives home is. Yes, you’re not as big a snowflake as you think you are. There are other people out there that have skills, and they can be brought into your team. It’s okay. If we have to let Bob and maybe Charlie and maybe Doug go, you know we have a utilization. But hang on to the mission. Pay yourself for what you’re worth. Reset the mission and go back up. You’re not even the 15 years that we talk about. Right, the 5 stages, 3 stages and the 5 years of each stage. Those aren’t straight lines, guys. It’s a tightrope, but it’s got some sags in it, and it’s going to go up and down, be ready to pivot. Yeah. And as a matter of fact, in your plan should be the envelope in your in your right, in the right drawer of your office, you know you pull it out in case of emergency. What should I do? You should have already planned through. What do I do in a case of emergency, and if you’re confused about it, I can have a conversation with you about the lines in the sand that you draw even in our firm. I’ll tell you. You know one of the great ones we have. You know we’re going to happen if we have to return to, let’s say. eating Tacos. Great. Okay, we’re going to go down. We’re going to go down from steaks to Tacos, but also have a plan for what I call the mustard seed. What happens if I have to go absolutely nuclear and start over.
Greg Alexander: Yeah.
Ken Yager: What do you do and just be ready. I mean, I don’t want to be so sad. Everyone’s going to have a bad day, but I’m trying to help people turn mountains into molehills so that when that day happens it isn’t that shocker. And you just. You’re in the headlights and crash.
Greg Alexander: Yeah, there’s a way.
Ken Yager: There’s a way around.
Greg Alexander: You know one of your tools that I love is the 13 week cash flow, forecasting tool. I don’t know if that’s how what you call it. But that’s the tool that I’ve been exposed to. And it’s a great tool. One of the challenges that some of our members are going to have using that tool is it requires at least, as I understand it, some historical data to then project out what happens when your historical data sucks. You either don’t have it, or it’s unreliable, like. What do you do in that scenario?
Ken Yager: Yeah, all right. So this is my everyday. Our clients always have trouble. This is why we come in to help them with this rather otherwise simple tool. It does get like I said, cash flow is complicated. So it does take a little effort. What we tell people to do or how we help people with explain this data is, most of our clients are people with bad accounting data. So your bad historical data isn’t going to stop you from doing this exercise. As a matter of fact, the reason this exercise exists is because people have bad historical data, and they need to get a grip right now on what’s going on. And so the world says, Okay, stop with your monthly financials. There are 3 or 6 months. What are your working capital balances? And let’s walk forward from here on a weekly basis, a timeline that allows us to see enough into the future. Understand a week be able to hold ourselves accountable on a weekly basis, which is, say, Okay, are we making this happen? Because usually we’re in a crisis, we don’t have a month to play with things. But it’s you can do this just thinking about cash. We have clients at different levels of activity where we say, Okay, look, there’s nothing here in the accounting department that’s going to work nothing. We’re going to go use bank statements, and we’re going to start there because we can rely on that. There is a way to start these cash flow models and then build on that from there. There’s no excuse not to start one, and then on the flip side of that, if I can throw the commercial break in there. This is the thing this model we’re talking about. Oh, use the cash flow model if you’re in crisis. This also is the tool that venture capitalists and private equity use in all of their investments. And if you’re on the sell, if you’re in the exit stage here in in Collective 54, they’re going to put your company on a 13 week cash model before they send the money to you. Yeah, you’re going to be on a 13 week cash flow model at some point in your future.
Greg Alexander: You know, when we were together in Fort Worth, and we were having this conversation, our friend Dan Bernoski was sitting next to us, another collective 54 member, and he says to you, Ken, are you telling me that I should be looking at cash flow weekly? And you said Yes, absolutely. And he and I said to him, I said Dan, when do you look at it? And he said monthly, but if I’m being honest, maybe every quarter.
Ken Yager: Yeah.
Greg Alexander: And we were both surprised by that. So, and I don’t think Dan’s alone. I’m not picking on Dan.
Ken Yager: No, so it’s a good case study.
Greg Alexander: Yeah. So the 13-week cash flow forecast is not just a tool used when you’re exiting, but it’s a management tool that you use to run the firm. So tell the audience why you advocate for managing cash flow on a weekly basis.
Ken Yager: All right. So first off, let me paint a picture that does it, because now everyone’s got in their head they’re sitting at 10 o’clock at night on a Thursday, looking at their financials. Now I got to do a cash flow model, too. No. The management of the cash flow model should take you less than about 30 minutes, and it should be done in the presence of other members of your team who are helping you not only manage the model, put it together, which is also, by the way, a 30-minute to hour exercise most at worst for them. If it’s done right, it’s a 5-minute exercise for you. You can manage this very quickly and very easily. So that’s just so we paint the picture. This is not your chain to the desk. This can be done on the fly. You can be the guy in the car, the airplane, wherever and you can be managing your cash flow very easily. The tools are there. We can show people, and it’s through a thing called the Variance Report. Now, that aside. So how do I use this cash flow model to manage the business? I tell people. The cash flow in the business, and I’m kind of using my hands here to say, Here’s my cash flow model. I’m taking a picture that I’m looking at on the backside of that cash flow model. I’m gonna flip it over. Or my KPIs. What I’m doing to drive the business. What activities am I doing to drive the business that is pushing the cash flow of the business? If those two things aren’t connected, what you have is an executive board level management oversight tool that may or may not have any use to you. It certainly can’t be used with your management team. So if the KPI isn’t something that you can understand that your management team is living to, that ties up to the cash flow model, you’re probably just doing some sort of magic management exercise that really isn’t driving your business and is driving you nuts. It’s kind of that definition of insanity.
Greg Alexander: So it’s a very insightful contribution here, because we have a lot of members, for example, that use EOS.
Ken Yager: Yes.
Greg Alexander: And EOS has a thing in it called the scorecard, and the scorecard is a list of KPIs of numbers that you should be managing your business to. My hunch is, I don’t think we have a single member that actually ties the KPIs to the cash flow forecast, which is a big, big, big, big learning, because in the end, what’s the point of managing a scorecard full of KPIs if it’s not tied to the cash flow report? Like, what are we doing? We’re just reporting on kind of vanity metrics like they don’t mean anything.
Ken Yager: Exactly. We all come in and everyone gets to cheer and clap because we hit some sales goal. But what did that do, guys? You know. Can we pay? We can’t pay ourselves with a sales goal. You know. What does it do?
Greg Alexander: Yeah, exactly. All right. Well, very good. We only had 15 minutes, and we’ve gone 20. This is really good. I’m really looking forward to the member Q&A session which we’ll have on this. I’m sure members are going to have lots of questions regarding it, especially when they actually see the model and how it might work, and especially when they understand that they’ve got to tie their KPIs to it. That’s going to be a really big, interesting thing. So Ken, on behalf of the members, we always appreciate your contributions to the community. Thanks for being here.
Ken Yager: It’s my pleasure. I get so much out of the Collective 54. I’m always happy for the opportunity to give back.
Greg Alexander: Alright awesome. All right. Some calls to action for the listeners. If you’re not a member of Collective 54, you want to become one go to Collective54.com and fill out an application. We’ll get in contact with you. If you are a member and cash flow is a problem, look for the invitation to the private member Q&A which Ken will be on, and you can ask questions directly of him. If you’re not interested in either of those two things, and just want a more broad education about the types of things we talk about, I would point you to my book. It’s called The Boutique: How to Start, Scale, and Sell a Professional Services Firm. You can find that on amazon.com. But until next time I wish you the best of luck, as you try to grow, scale, and exit your firm.
Note: This transcript was generated by Zoom.