228: Crown Your Cash with Peter Kingma

26
Jul

Peter Kingma, Head of Working Capital Practice at EY Parthenon Americas, is driven by his curiosity and passion for solving problems to help leading companies crown their cash and master cash management. In “Cash is King,” he emphasizes how effective cash flow management, distinct from revenue generation, is vital for sustained business growth and resilience.

We discuss his framework for converting revenue into cash: Collect Receivables Faster to boost liquidity and reduce dependency on credit, Pay Customers Slower to optimize cash utilization, and Accelerate Inventory Turns to minimize holding costs and enhance operational efficiency. These strategies not only streamline financial processes but also fortify businesses against market uncertainties, ensuring robust financial health and agility.

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Crown Your Cash with Peter Kingma

Good day, dear listeners, Steve Preda here with the Management Blueprint Podcast and my guest today is Peter Kingma, the head of the Working Capital Practice for EY Parthenon in the Americas and author of Cash is King: Mastering Cash Flow Management with Peter Kingma. Peter, welcome to the show.

Thank you, glad to be here.

Yeah, well, I’m glad you’re here because actually, believe it or not, we are well into over 200 episodes, but we never actually addressed the king, which is cash, which is a big omission, I realize, and now we’re going to make up for it. So, before we jump in on that, I’d like to ask you, what is your personal Why? What is it that gets you out of bed every morning?

I’m curious, Steve. That’s my personal Why. I love to solve problems. Some might say that’s because I have a short attention span that I like to go from problem to problem, but I love to solve problems. And the past 30 years of my professional career, I’ve been helping companies. Now, we’ll talk about small businesses in this discussion, but admittedly big businesses for me, on a day-to-day basis, but helping them deal with cash and liquidity. And what I love, Steve, about what I do is I can measure the results. So I can see at the end of the day, I can see the benefits. And I’m very proud of the fact that my work helps some very iconic companies stay in business. And so there are people that are employed today because of decisions that they’ve made. And, yeah, that’s my why. I love solving problems. And I like sort of tackling big questions.

Okay. Well, let’s tackle the biggest question of all is why revenue is not the same as cash.

Yeah, let’s start at the beginning. So, I think in business we understand revenue and profit fairly well, but we don’t always understand the difference between that and cash. So if you think about revenue, let’s say we sell something, but if we haven’t gotten paid for it, and we don’t have, so to speak, the cash in our pocket, then we don’t have the ability to pay our bills. And so, Steve, if you will, let me take you back in time to when I was just out of college and kind of a silly example of this, but I think that it kind of grounds itself really well. When I was just out of college, I was living paycheck to paycheck. And fortunately, my employer paid me on the 1st and the 15th of every month. So, I knew when I was going to get paid. And fortunately, my landlord didn’t come knocking on my door random days of the month asking for rent, I knew when that was when my bills were due as well. So even if I had, even if they gave me, you know, a little bit more money or a little bit less in any given month, I had to say I knew exactly when the revenue was coming in, when the cash was coming in, and when my bills were to be paid. So, I think in many ways, we understand that in our household economics, but then we get into business and sometimes I think we get confused because we start to confuse and chase revenue and revenue alone and forget that it’s the cash that pays the bills. It’s the cash that you use to buy new equipment to invest. And that’s what creates the wealth ultimately.

And so that's why I think cash ultimately is king. Because you can have revenue, but if you don't have that cash, then you can't actually run the business and grow your business. Share on X

Yeah, and there are stories about fast-growing companies that actually go bankrupt, kind of shocking stories. In fact, I had a client who was in a business, they were in a construction type of business, they helped companies and consumers who had their houses either burned down or flooded, they went in and they cleaned it up and then they rebuilt it. And they had a lot of business coming through the door and they were working really hard, serving a lot of customers. But what happened was that most of these jobs were paid for by the insurance company. The insurance company took its sweet time to process these projects and they actually spent their money hiring people, renting equipment, drying out those houses, building materials, everything. They were just getting these jobs done, but the money kept not coming. Eventually, what we realized was that the faster they were growing, the more cash they were running out of. Eventually, they had to slow down the whole process. They had to be much more disciplined about collecting cash, and to be more discerning about which customers they’re going to service and which insurance companies they work with. So, it was a very big, big lesson about fast growth is not going to always help you.

Fast growth and Steve, even mature companies have problems with this in the book, I talk about a great, a great story, if you remember that the video chain Blockbuster, for the older listeners, that was a video chain that was on basically every corner, there was a Blockbuster store and you’d have to go and you’d write your tapes. And then this little upstart company called Netflix came along and they thought they were going to reinvent this by sending you the videos, at the time, DVD discs in the mail. But even that was starting to change, right? There’s digital, this thing called digital streaming was taking place. About that same time in the early 2000s, Netflix went to Blockbuster and offered to sell themselves to Blockbuster. And I think the price, and I’ve got it in the book, but I think the price was only like $50 million. It was something very low. And Blockbuster thought the valuation was too high. So, they didn’t. And then, you know, years later, as this digital streaming was coming about, Netflix had access to cash and capital. So, they were able to pivot and change their business model. Blockbuster didn’t. Blockbuster had plenty of revenue, but they didn’t have the cash flow and the capital access. And so now today, you know, Netflix is, I don’t know how many hundreds of billions in valuation and Blockbuster is gone. Blockbuster went bankrupt, they had to liquidate. So even big established companies, this can trip them up. That it’s the actual cash that keeps you in business and that gives you the ability to respond to changes in the market and to weather downturns.

Okay, so that’s a great point to talk about your framework, because as you know, this podcast is all about frameworks, and you have a kind of a four-step framework to turn revenue into cash. So, if our listeners would like to think about this big picture, what it looks like, how am I going to make sure that our revenue doesn’t disappear in a big pile of working capital on my balance sheet and never see the money? So how do you turn revenue into cash?

Let me describe what working capital is, just so that we’re all on the same page. So, working capital is accounts receivable. So that’s what people owe you, right? So, you sell something, but if they haven’t paid you yet and they owe you, that’s accounts receivable. Accounts payable is what you owe someone else. So, when you go buy something, you know, the time that it then takes for you to then go pay them, so that float, if you will. And then there’s inventory, which is something you buy. It has value, but it only has value when you actually sell it and then collect it. Right? So, when we talk about trade working capital, we’re talking about accounts receivable and inventory minus accounts payable, because those that the accounts receivable and the inventory of the things that have value and accounts payable is something that you owe others. So, okay, so in a simple world, you know, we want to get people to pay us faster. We want to pay others slower. And we don’t want to hold on to as much inventory as we don’t need, because that’s tying up cash or capital in our business that may not be productive. So, if we go back to your question of how do you convert revenue into cash, let’s just assume that you’re making a product. And it can apply to services as well. But let’s just talk about companies that make a product. You have to go out and buy material. So those are the goods that you’re going to make your product with. And you want to then have a payment arrangement with those vendors that you’re buying that with that gives you enough time to pay them such that you can now create that product, sell it, and get collected. And so, you want to not be on the negative side of that. So, the very kind of quick thing I look at when I look at companies is I look at their days, sales outstanding, which is that’s when people have to pay you, right? So, how many days does it take for somebody to pay you and your days payable outstanding? How many days does it take for you to pay someone else? And you want that to be flipped. You want your day’s sales, so somebody paying you, you want that to be shorter than what you pay somebody else. And then you also then look at something called inventory turns, which is how quickly can I get rid of my inventory and sell that on. And you want that number to come down as well. So, think of it as like golf. You want your receivables number to be low, you want your inventory turns to be fast, and you want your payables number to be high. So, the opposite of golf.

Yeah, so I’m thinking about, okay, how do I achieve that? So, inventory, I have to negotiate with my customers or differentiate my product to make sure that they’re willing to pay me quick because if they can go somewhere else, then okay, then I don’t have a position. If I have a unique product, maybe I do. Paying slower, obviously, if again, that’s the opposite, so negotiate longer time. Minimize inventory, so you talked about two type of inventory, or at least implied it. So, you purchase materials that have the input inventory, and then your product is the output inventory. So just-in-time management, perhaps, is a way to do that. So, what are the low-hanging fruit ways of actually achieving that? So, getting, lowering your receivables, raising your payables, and speeding up your inventory cycle.

Perfect. So, let’s start with receivables. The first thing to do is A, this applies to payables as well. But the first thing to do is to understand what power you have in the negotiation dynamic. Right? So, if you are, let’s say on the receivables, you’re selling to a very big company, you’re selling to Walmart, for example, you will not have any negotiating power. It will be, these are the terms, you have to accept them, this is what you’ve got. If you’re selling to a small business, another small business, then you may have negotiating power. So, the first thing is to understand where you’re at in that sort of power dynamic. But let’s say you are selling to Walmart and they say it’s 100-day terms, take it or leave it. Well, then you need to do everything you can do that’s within your control to ensure that that bill goes out exactly on time to the right place with the right information, the right PO information, purchase order information if they require that, so that you can minimize the clock, right? If it’s 100 days, you don’t want to add any more time to that payment clock. And I see businesses get tripped up on that all the time. You talked about construction. That’s maybe one of the worst, right? Because construction bills usually are based on milestones, on completion dates. And so we get very busy doing the work, and we may have completed the work and then we wait another few days because that sort of back office boring stuff about getting a bill out, I kind of put that off and I do that a few days later But every day I do that is a day that that’s cash not in my pocket So I’ve got to treat that as important and as seriously as everything else I do. On the payable side, Steve, so when we talk about that power dynamic, now when you’re in the buying position, you need to see what levers you pull in that relationship. And ideally, and here’s a little trick, if you’re buying from a publicly traded company that has data that’s available, go look at what their day’s sales outstanding. That’s what they would record on the reverse side of this. So, if their day’s sales outstanding is 45 days, but they’re saying that their payment terms are 30, well, you should negotiate for 45 because everyone else is somehow paying them in 45, not 30. So, that’s also important is to understand, and then also hold them accountable on the people you’re buying from, hold them accountable the same way you’ve been held accountable for your customers. That you will only pay when they send you that invoice and you record the date on that invoice. Not the date that’s on the invoice, but the day that they actually send you the invoice. Because, let’s say, the date on the invoice is the 15th of the month and they send it to you on the 25th of the month. You don’t want the payment clock to start on the 15th. You want to start on the 25th. You need that extra time. It was their fault that they send it to you 10 days late. So, hold them accountable the same way you’ve been held accountable.

Yeah, I’ve been always wondering how is it that I get an official letter and it says a date which is 10 or 15 days earlier than I receive it. There’s no way the USPS takes 15 days. I think it’s their internal bureaucracy trips them up or maybe they put the wrong date. I don’t know what they do, but anyway, the other thing I was thinking as you were talking that sometimes when you are not disciplined with sending out the invoice on time, you are essentially signaling to the customer that they don’t have to be disciplined in paying you on time. And I think it’s a very bad signal. Plus, sometimes these bills can pile up. I used to work with an attorney several years ago and he was very busy, very good attorney, but he was very busy and he just forgot to send the bills and every three months he tried to catch up and then he sent me an enormous bill and I didn’t have the cash to pay him right away. It took him three months to send it. Maybe I can take three months to pay it. And I don’t think it was a good cash management on his side.

You’re right. It creates a bad customer relationship, right? So not only in that situation, was it bad for him because he waited the three months and then you weren’t able to pay him, but it created a bad situation for you. Right? And so the fact that you still remember that today creates a bad customer relationship. People don’t want to be surprised. I go back to that thing when I was right out of college. My landlord didn’t come knocking on the door asking for payment or my company didn’t just decide they’re going to pay me 30 days whenever. We want predictability. We want to know when our revenue is coming in, when our cash is coming in, and we want to know when our bills are due. And if people are bad with presenting you with that bill, or, you know, you’re bad at doing that to your customers, that creates a bad customer relationship situation.

Yeah, you might feel that you’re doing them a favor for not billing right away, but actually, it’s the opposite because they might forget that they spend so much money on the services and they lose it from their budget and then they are being courted their pants down. So let’s switch gears here, Peter, and let’s talk about your new book, Cash is King. I mean, I couldn’t agree more, but tell us a little bit about what is the premise of the book and why did you decide to write it?

Steve, I decided to write it because I don’t think there are, frankly, any books on the market today that talk about this concept in an easy to understand way. So, there are plenty of academic textbooks, there are accounting books. I didn’t want that. I created a fictitious company. And in every chapter, there’s dialogue between the characters. They’re trying to solve problems. So, I wanted to create something that small business owners that everyday people could understand these seemingly, could be boring or dry concepts, but that are so important. So, I wanted to try and bring it to life in a way that would be easy for people to understand. And again, 30 years of my work doing this for big companies, but trying to translate this down to something that every day, small business owners, entrepreneurs could understand.

Okay. So, what are the major themes in this book? So, we talked about receivables, payables, inventory. So, is it all there is about cash management? So, you just pay attention to these three items and you’re good, or there’s a lot more depth to it?

Well, I think the beginning in the introduction that, again, if you just get people to pay you faster, you pay people slower and you hold less inventory, you don’t need the book, right? That’s it. Now, the problem is there are a lot of decisions that you make on a daily basis. There are a lot of changes in commercial relationships that you have with your customers or your suppliers that will then trip this up or impact this. So, I explore, in one chapter, I explore receivables, the revenue that you collect. In another chapter, I explore payables and the different steps involved in that relationship. And then I think I laid out about six chapters just to talk about production and inventory. And let me tell you on the outset, I do set up this the fictitious company makes equipment, so they’re a manufacturing company, because that’s the one that ties up the most cash in a business. But in the last chapter, then I talk about how this applies to other businesses like services businesses, people in healthcare, people in construction. So, you don’t have to be just a manufacturer to understand this. But in that sort of middle section of the book, we talk all about forecasting and planning. And I do cover some concepts that hopefully aren’t too dry, but metrics and some basic accounting concepts. I’m not an accountant, but I do cover some basic concepts there. And I try and do that in a in a in an easy to understand and kind of humorous way in some ways. But these are the important elements that a small business owner would need to understand, really, to understand how everyday decisions impact your ability to either generate or to consume cash.

So, here is a last question I want to ask you is, how do you build a perfect business in terms of the cash perspective? And let me give you an example. I had a client 15 years ago who built CRO business, Contract Research Organizations, so testing drugs before they went to market. And what they did was they had these contracts with these big drugs companies who paid them up front for the whole program of essentially conducting these phase two, phase three testings. And this was a great business. They could grow it as fast as they wanted because essentially because customers paid up front, essentially the customers were financing the growth of the business. And at some point, they just couldn’t keep up and they sold the business. But it looked like a perfect business model. So, I was wondering if this is something that’s universally recognized, that there is a perfect business model for, from the cash flow perspective, and what is your experience with that?

Yeah, that’s the holy grail, is to get your customers to pay you upfront because then they’re essentially funding the business, your business growth. And there are some industries where that norm is accepted and works. So, think about when you go buy furniture, you know, oftentimes you go to the furniture store and you see the sofa you really love and they tell you it’s going to take, you know, 13 weeks to get it. And oh, by the way, you need to pay for half of it before you ever get it. So, there are some industries that we’ve trained the consumer to do that. You know, the other one I talk about, there’s a sort of a long running joke for the commercial airplane business that when you buy a big plane, when you get the delivery of it, they give you the keys to the plane plus the discount that you negotiated, a check for the discount, because you had to pay for it up front. Unfortunately, those aren’t all the businesses, right? So you talk about like construction, and construction is famous for a concept called paid when get paid. Right. So it’s very much of a Rob Peter to pay Paul throughout the whole process. Right. Because you’ve got subcontractors that they need to get paid. And you’ve got the whoever is the someone up the stream who’s building the project. They had to pay you. So, honestly, it depends on the industry that you’re in and understanding what the norm is. And then I get back to, it’s kind of like that power dynamic question.

You need to understand what the norm is and then what your power dynamic is within that industry, either your customers or the other people, your vendors, the people you're buying from. Share on X

And then you need to control that as closely as possible. So, Steve, I refer to things like a concept that I talk about the book is to calculate. So, let’s say it’s on the receivable side. What’s your best possible receivables, best possible days to collect? So that would be if everybody paid me exactly on time, according to the contract, what would that look like? And then if I calculate now, what are they actually doing? That delta represents a failure rate. That represents something that you need to then go lean into, figure out why that is. Maybe it’s their deadbeats, and maybe you need to stop selling to them, but I’ll bet a dollar that a lot of that is because of things that we do ourselves, that we don’t get the invoices out on time, we don’t get them to the right place, whatever. So, yeah, so I guess the holy grail is, if you can get people to pay you up front before you do any service, that’s great. Unfortunately, that just doesn’t work in all industries.

Got it. All right. So, lots of great information, Peter. So, focus on collecting receivable fast, slowing your payables and spinning that turnover, that inventory as fast as you can. That’s awesome. And cash is king. So, if people would like to read your book, learn about what you do, maybe connect with you, where should they go?

Peterkingma.com is my website. And on that website, you can link to buy the book from Amazon or Target or Barnes and Noble, wherever. But I also put content on there, Steve, so I write for other publications, different magazines and business publications. So, you can read other content that I’ve got on this topic.

Peterkingma.com. Definitely go check it out. Peter, thanks for coming on the show. And those who are listening to make sure you follow us on our LinkedIn page. Steve Preda Business Growth LinkedIn page and on YouTube channel for future episodes. Thank you, Peter, for coming and thanks for listening.

Thanks, Steve.

 

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