Proper cash flow and management is the key to effectively operating and investing in your carwash. A good manager knows that managing a business by the numbers is both a science and an art.
The numbers are staggering. According to the Small Business Association (SBA), 30 percent of new businesses fail during the first two years of being open, 50 percent during the first five years and 66 percent during the first 10 years. In this situation, we are talking about new businesses.
This means a lot of different factors could have come into play, including: the new business having picked the wrong location; having had a bad concept to begin with; the owners not being fully skilled at operating the new business; or having been undercapitalized from the beginning. So, I am going to hypothesize that maybe only 50 percent of the businesses that failed were undercapitalized.
You would think that it would be easy to see and/or understand that a business was either undercapitalized or about to be undercapitalized and correct the situation. However, it is not as easy as it sounds. Let me explain to you why.
I have owned 40 different businesses, and I can only think of a few that were fully capitalized, which immediately put me behind the eight ball. Why did I start or buy a business without enough cash to fully operate it? The answer is because of my inexperience in not understanding all of the things that were happening and the things that could happen, and then not accounting for these items in my cash flow projections.
Basically, I was delusional and working off what I wanted the sales numbers and expenses to be instead of being a realist and factoring in a more realistic cash flow proforma.
Breaking down your cash flow
Let me give you an example of what I am talking about. If you presently have a business and you are having monthly profit and loss (P&L) statements prepared by either your accountant or a bookkeeper, you will have a line item for all of your different income streams to help you track where you are making your money, and hopefully you will focus your time and attention on the areas where you are making the most money. And, you will have line items of all of your monthly expenses to help you track where your money is going and again to help you focus on where to reduce your expenses.
On the expense side of the statement, you will have a line item for depreciation and repairs. Now, I used to think that depreciation was something that the IRS allowed us to take off our gross income, so that we didn’t have to pay so much in taxes, which is true. But, there is another reason for depreciation.
What it is telling us is that our equipment, building and items used in the daily operation of the business are getting older and wearing out, and we need to allow for the replacement of these items. In other words, as operators, we generally don’t allow for some cash to be set aside to repair or replace the items we are depreciating. So, when something breaks — and it eventually will — we generally have already spent the income we have produced, and we are therefore short on cash.
Then what happens is that if we don’t have the money to fix or replace what just broke, we either have to go borrow the money or do without and operate at a lower level, because we didn’t have the money to fix things right.
Once we start to run short on cash, it sends signals throughout the entire operation. First, your employees will notice what you are doing and see the signal you are sending as to how you plan to operate, and chances are they won’t stay around very long either because people don’t like to work for a losing business. Worst of all, your banker or investors who provided you with the money to get the business going will turn off the money, and then the wheels will come off everything, and it is downhill from there.
It all sounds too simple, doesn’t it? But in reality, this is what goes on every day, and having lived this life, I know all too firsthand what happens when a business gets in this situation.
So, let’s look at how we can correct this situation from happening and what to do if we are already in this situation.
Cash flow is king
First and foremost, if you get nothing else out of this article, remember that the first rule of running a business is cash flow. Period. I don’t care what anybody tells you — it is always about cash flow, because if you don’t have enough cash flow coming into the business, then everything else is a moot point. You are going to be out of business in a short time.
We all know from our personal lives that you can only cut so much on your personal expenses. You can eat less, live in a cheaper place and not spend money on frivolous items, but you can only cut so much, and eventually you get to the base amount of money you need to live on.
Well, the same is true in business. You can project how much you are going to need to replace the items you are depreciating and for repairs and maintenance. But ultimately, you have a base amount of operating expenses needed to operate the business. So, everything always comes back to cash flow.
If you had worked for me at the time when I operated my businesses and had over 200 stores around the country and I called you, the first thing out of my mouth would be me asking you what our sales for a certain period were. I wouldn’t have asked you about how much you were spending in supplies or scheduled hours — I would have asked you about sales, and if you didn’t know the answer, chances are you would not have been with my organization much longer.
Recently, I spoke to a 30-year veteran Wal-Mart Supercenter manager. Since I used to be a vendor to Wal-Mart, I have always had respect for how the company operated. Love it or hate it, the company has systems in place and knows how to make money.
The veteran manager was sharing with me how, in his 30-plus years of working for Wal-Mart, he had the opportunity to meet Sam Walton, who is the founder of Wal-Mart, on three separate occasions and what a wonderful and smart individual Walton was. However, when he shared his story about the first time he met Walton, he shivered when he told it to me.
At the time, this person was the manager of a Wal-Mart in a small town in Indiana, and Walton had flown into the local airport. It was the manager’s job to go pick him up and drive him to the store to check things out. As soon as they got to the store, the first thing Walton asked my friend was about the sales of the store and the sales in certain departments. My friend said he didn’t know the answer and was not only embarrassed but also concerned about losing his job.
The point I am making is that Walton knew that cash flow is the heart of a business and is what drives the business. You should already know this, but if you don’t, you will learn the hard way when you don’t have enough money to keep the business operating.
I know this may sound too simple, but the key to a successful business is cash flow. And, the way to ensure you have strong cash flow is to find out what is working to make the most cash flow for your business and do more of this, and then find out what is not working and do less of that.
Focusing on your top line
I am a top-line person and will do almost anything to increase the top line of my business. There is hardly any type of marketing I wouldn’t try to increase the cash flow of my business. Notice that I didn’t say advertising. Advertising is one thing, and marketing is another.
Advertising is easy. Marketing is harder because you have to get into the minds of your customers and quantify the types of customers you have and go after them in different ways. I am not going to go into depth in this article about the difference between advertising and marketing, but it is what drives top-line cash flow, and you should be doing this every day.
So, to ensure you have a successful and profitable business, be realistic as to what your costs and expenses are going to be over the next 12 months. Factor in seasonality for your cash flow and adjust accordingly, because while your income will fluctuate, your expenses will probably be close to the same.
Be frugal and don’t be delusional and think this year is going to be different. It may be different but in a negative way. And, don’t think opening another location will solve your problem either. There is nothing worse than to have a mediocre business and then open another business only for it to be mediocre or worse. Then, you are really in trouble. I know, because I tried this more than once and it didn’t work.
Running a business is not an easy job, but a business that is run properly is satisfying beyond belief. It takes focus and discipline and, yes, some luck too. Sometimes you can control your luck, but I have been much more successful in business when I focused on the top line and cash flow, and somehow my good luck always appeared — and it will with you too.
Terry Monroe, president of American Business Brokers & Advisors, is the author of “The Art of Buying and Selling a Convenience Store.” Monroe’s latest book, “Selling with Certainty,” is now available on www.TerryMonroe.com and Amazon.com. He assists in market valuations and serves as an advisor, consultant, speaker, professional intermediary and a market maker for privately held companies. He has also been involved in the sale of more than 500 businesses. In his 30-plus years of service, he has owned and operated more than 40 different businesses.