The Three Clocks Of Small Business
Ti-i-i-ime is on my side - yes it is.So sang Mick Jagger, lead singer of the legendary rock-and-roll band, The Rolling Stones. As lyrics in a ballad this is a nice sentiment, even romantic. But in small business, it's hogwash.
Oh, sure, it's true that we all have the same 24 hours in every day. You might say that the clock, like the rain, is the same for the just and the unjust. But in the marketplace, especially with regard to small business, there are three clocks at work: One for operating expenses, one for sales, and one for cash.
The time that each of these three clocks keep is not always on the side of small business. Small business owners know that the clocks that tick on their sales and cash receipts seem to have hands that drag or even get stuck, while the clock that is in control of their expenses is so well oiled and finely tuned that the hands seem to fairly fly around the face.
Let's take a look at the three clocks of small business.
Operating Expense Clock
Operating expenses are different from vendor payables in that, for the most part, they don't vary as sales volume varies. Every month, like clockwork, whether sales are good, cash collections are on schedule, or profits exist, payroll must be met, the rent payment must be made, taxes must be remitted, plus there are phone bills, utilities statements, insurance premiums, etc., which must be paid. The Operating Expense Clock is hardwired to Greenwich, England for accuracy within a nanosecond per millennium, has a Triton Class atomic battery backup, and a fail-safe 100 megawatt generator ready to kick in when all else fails. Nothing stops the Operating Expense Clock short of a global, thermo-nuclear holocaust, coinciding with a direct hit from Halley's comet.
In his book, Blue Highways, William "Least Heat Moon" Trogdon writes that his grandfather, a full-blooded Osage Indian, once told him, "some things don't have to be remembered - they remember themselves." Grandpa Trogdon could have been talking about the Operating Expense Clock.
For every operating purchase made, and product or service consumed, new momentum is added to the hands of the Operating Expense Clock. The only way to influence this clock is through operating efficiencies. You won't be billed for something you didn't buy.
Sales Clock
This clock is associated with the relationships you've worked hard AND smart to create with your customers. Through dint-of-will you have earned their business, the progress of which has been flowing through your opportunity pipeline so that sales will result each month.
You attempt to project which sales will occur which month by doing a good job of qualifying your prospects and customers, and understanding their motivations, requirements, and time parameters. You have quantified the selling cycle for each prospect, and as the transactions mature, you attributed a "clock" to each one as you budget for future sales.
A sale is made when a customer says, "I'll take it", or signs a contract, or gives you a purchase order. Notice that there is no mention of cash received in that definition. Yeah, there might be money accompanying a sale transaction, like a deposit, or cash paid at a retail point-of-purchase. But for many transactions, the agreement to buy and to sell is merely the first official step toward the exchange of cash for value received. The actual receipt of cash may come later, as in days, or much later, as in months.
The Sales Clock is logical and instructive. Even rookie salespeople, as consumers themselves, understand that a sale will be made when the prospect's purchase requirements have been met. And since they are right there conducting the steps of the sale, your sales staff actually experience and participate in the creating of a "clock" for each sale. Logical and instructive.
But what is not so logical or instructive is the difference between Sales Clock time, and Cash Clock time.
Cash Clock
My friend, Tim Berry, President of Palo Alto Software, says, "Cash flow is not intuitive." Even though I agree with Tim completely, knowing this still bothers me. I have been trying to come up with a metaphorical handle that might help to make the Cash Clock, and how it works with the other two clocks, a little easier to understand. Here's my latest attempt:
Cash is to sales as snow is to winter:
• You can have winter without snow, but you can't have snow without winter,
• You can have sales without cash receipts, but you can't have cash receipts without sales.
And expenses are like weather: You get some every day.
I have already told you that NOTHING slows down, let alone stops, the Operating Expense Clock. Unfortunately, there are many circumstances that can impede the ticking of the Sales Clock. If you've ever sold anything with a ticket of more than $100 you can probably list hundreds of mainspring failure examples in the Sales Clock.
But what you don't know until you experience it as the owner of a business, is that for every glitch in the mainspring of the Sales Clock, there are 1000 sprocket failures that can happen to the Cash Clock.
And unlike the rock-steady ticks on the Operating Expense Clock, or the control you may have over the movements in your Sales Clock, many of the things that stop your Cash Clock are out of your hands, often after the sale has been made. Here are just a few examples:
• Customer cancellations: A cash receipt train wreck.
• Back orders and order-filling mistakes: The customer is waiting, but no cash receipts until orders are filled correctly.
• Freight damage: You reorder, but in the meantime, no cash from this customer.
• A virtually infinite number of ways a customer can delay payment: Not only no cash, but vendors are calling.
• All of the ways your company can screw things up, even in the best run companies: This is called "shooting yourself in the foot."
Each of these, or any combination, can create havoc with your Cash Clock, even while the Sales Clock is ticking, and as the perpetual engine Operating Expense Clock whirrs along as if on a mission.
Sometimes, incredibly, the Operating Expense Clock will actually seem to speed up - you can't believe that it's Friday, or the first of the month, already. But it's only the perception of speed created by the slowing down or stopping of the Cash Clock. Alas, perception can be as stressful as reality.
In the song, "Time Is On My Side", Mick is singing smugly about knowing that his girl will come back to him. You will find very little smugness in small business. In small business, time is only on our side when the Cash Clock is running.
Some have said that most small businesses are undercapitalized. I say ALL small businesses are undercapitalized. When you understand how the three clocks of small business work, you understand that it is virtually impossible for a small business to be adequately capitalized.
Small business owners have asked me how much working capital they should have in their businesses. My answer is, "all you can get your hands on."
Write this on a rock... Murphy's Law (Anything that can go wrong will - Everything takes longer than you think.) flourishes inside of the Cash Clock, and is a frequent resident in the Sales Clock. But the Operating Expense Clock, totally immune to Mr. Murphy's insidious law, rocks on just like The Rolling Stones.
