3 Cash Flow Mistakes That Nearly Upended a Profitable, Growing Business

3 Cash Flow Mistakes That Nearly Upended a Profitable, Growing Business. When my co-founder and I started Storyhackers, we never anticipated that within seven years, we would become a 28-person team with dozens of clients. With a thriving business model and a team of intellectually curious consultants by our side, we found ourselves empowered to pursue big ideas—to democratize access to storytelling education, build documentaries, and mentor emerging consultants to build their own businesses. It’s been a fun ride so far and we are so excited for the coming years. But there was—and continues to be—a major challenge that stands in the way of pursuing vision: cash flow. We’ve never prioritized the accounting side of our business. Frankly, we didn’t really know where to start. We relied on spreadsheets before graduating to an accounting software that wasn’t robust enough to scale with our organization. We learned the hard way that growth doesn’t always correlate with cash flow. As our business grew, we decided to hire a strategic accounting firm. Even though our sales and growth metrics were healthy, our financial infrastructure was at risk. Like most agencies, we pay our team faster than we receive funds from customers. This is an inherent challenge for most service business, but when it takes three, six, or even nine months to collect on accounts receivable, CEOs start to get uncomfortable. [WooZoneProducts asin=”B01MEHJCPN”][/WooZoneProducts] As our accounting partner, Bill Mosca, founder of Accountiful told to us, “I’ve seen highly profitable businesses fold, purely due to cash flow.” Fortunately, we weren’t anywhere close to our breaking point as a business. We always maintained cash reserves. Still, I felt like Pandora’s Box had swallowed me whole to explore a brand new world. “The thing that sinks entrepreneurs again and again is conflating profit with cash flow,” Bill explained. “Just because a business is profitable doesn’t mean it’s got sufficient cash flow to sustain itself.” With these words of wisdom, we decided to put our growth plans on hold—indefinitely—until we felt comfortable with a financial infrastructure that would grow with us. One year after making that decision, we’ve reached about 80% of our financial goals. I’m an entrepreneur, not a cash flow expert. Our team is made up of storytellers, technologists, statisticians, and artists. Despite our knowledge gaps, however, we’re committed to running a sustainable, cash-dependent business that helps us achieve our long-term goals. We’re also committed to helping fellow entrepreneurs learn from our experience. By virtue of our biggest mistakes, here are some of the most powerful cash flow lessons that we’ve learned in our first seven years.

Mistake #1: Relying on Fragmented Data to Make Strategic Decisions

When Storyhackers was a two-person consultancy, spreadsheets and basic accounting tools worked just fine. We planned our finances on a monthly basis, and we could track our cash flow with minimal effort. Still, we were extra cautious, maintaining significant cash reserves and backup lines of credit. Both then and now, we never spend more than we earn. But when our business grew to include a team, everything changed. We needed a more integrated, comprehensive view of our financial systems. Our accounting consultants designed a system that integrates Quickbooks, Bill.com, and Tallie into a cohesive system. We can pay our vendors, develop reporting, and answer customer questions within minutes. And before that? Let’s say a client or team member has a question about an invoice. My co-founder and I would needed to manually dig through records, which sometimes took days because the information was buried and our plates are full as it is. Now, with a system and reporting structure in place, we can not only answer questions quickly, but we’re ready for the next stage of our financial planning process. We’re in a position to work with a CFO who can help us plan our business investments across longer time periods. We can create comprehensive reports with just a few clicks. Accounting is no longer a barrier to growth. The biggest lesson we’ve learned? Just because you have cash doesn’t mean you should spend it, especially in the early days. “A lot of entrepreneurs over-spend at the beginning, reasoning that they need this stuff to run the business,” explains Wendy Connick, enrolled agent and owner of Connick Financial Solutions. “In reality, the longer a new business can delay a purchase, the better. You may need a piece of equipment at some point, but if you can wait until you really need to start using it before you buy, you’re keeping that cash available for other purposes, including the inevitable expensive crisis.”

Mistake #2: Leaving Payroll to Manual Processes and Email Inbox Overload

Our company has the good fortune of working with some of the most talented creative consultants on the planet. It is paramount that our company pays each individual on time—regardless of how long it takes for our customers to send funds our way. We treat our team like family. As a mentor once told me, “Never leave your team worrying about their income.” But there we were, with the best intentions, failing to make our payment deadlines simply because I could not manage our cash flow. It was sloppy. It was choppy. It was unacceptable to the people who put their trust and time into our organization. What would happen if we were to continue to miss paying invoices and destabilize our payroll? We would de-value our people and that simply wasn’t acceptable. As a fellow entrepreneur, Bryan Clayton, CEO of lawn care marketplace GreenPal puts it: “I can’t tell you how many sleepless nights I’ve had wondering how we were going to make a payroll on Friday that was $300,000 a week during the peak parts of our year. One instance I had to go hat in hand to my management team and ask that they not cash their checks for a couple weeks so we can make sure our operating core will get paid.” Never wanting to leave ourselves in this position, our accounting partners set up a system where our leadership team can browse, approve, and track invoices with a few clicks. The sheer speed that this system facilitates ensures that our cash view is always up to date. There are no cash flow surprises, meaning we can spend our time helping customers and earning new sales—and of course sleeping soundly at night.

Mistake #3: Not Monitoring Profits and Losses on a Regular, Systematic Basis

Prior to launching a company, I was fortunate enough to have had profit and loss (P&L) management experience, overseeing uncapped marketing budgets. For that reason, my co-founder and I could calculate unit-level profitability to precision. For a period of eight months during our accounting migration, we were running purely on backhand math and projections. Our forecasts kept us profitable, even when we had absolutely zero accounting insight. But we quickly realized that we were chasing our tails. Simply monitoring P&L statements put us in a position where we were constantly fixating on minutiae rather than the big picture. What we needed was to pay closer attention to long-term, aggregate-level metrics. Later, with the benefit of hindsight, we realized that there were early warning signs of a major cash flow problem. “An early warning sign of a cash flow problem is when your business revenue is about to fluctuate or recently has fluctuated by about 20 percent,” explains Ken Yager, cash flow consultant and coach. “That happens a lot to smaller companies that gain and lose customers and go through seasons and cycles. These are the things you should know will change your cash flow and you should be looking out for. Later state warning signs include NSF (not sufficient funds) checks, a series of missed or nearly missed payrolls and vendors that put you on hold.” While it’s important to monitor profits and losses on a myopic level—i.e. making sure that what you “sell” is profitable—it’s important to avoid getting stuck in the weeds. Until we had a system in place to align our cash flow with our strategic goals, we were flying blind.

Final Thoughts: Day One, not One Day

We ran into a cash flow crunch during our most critical growth period, and my one regret is that we did not implement our system and begin working with a strategic partner sooner. And why didn’t we? The answer is simple: my imposter syndrome got the best of me, and despite my co-founder’s pushing, I refused to look for outside help. I thought implementing an accounting system would happen one day, but it should have happened on day one.