Cashflow: the fine line between misery and happiness

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness.

Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Charles Dickens wrote this in 1850 in David Copperfield. The character’s name was Mr Micawber, who crossed the line into misery on more than one occasion.

While our unit of measure on money has changed, the truth of this statement hasn’t. It’s one of the most black and white “truths” in managing your finances. It’s true for both business and personal finances. Business finances are more complex with more moving parts, so that’s what I’ll cover here.

For one of my clients, they’ve now crossed the line to cashflow positive. For another one 12 months ago, they went the other way for a brief period. I’ve covered both scenarios below and how that changed things.

Moving to cashflow positive (happiness)

You only have to rise above the line by $1 and you’ve crossed the threshold.

This business is a B2B app with a monthly subscription model. Their cost of delivery for 1,000 paying customers vs 10,000 is much the same. This is one of the reason tech companies are so valuable.

They have had a large upfront product development cost. They are still investing a lot in product development. The recurring revenue is now paying for that. Hence they are cashflow positive.

The only way to fund the initial product development is capital raising, which has been a slow hard grind.

Will they stop searching for the right investment partners? No. This company no longer needs to capital raising to “keep the lights on”. It changes the dynamics completely.

It’s now about strategic partnerships to drive business growth & momentum. Why does that matter? Improving the revenue growth improves the underlying value of the business. It also creates surplus cashflow faster, which is the best defence for any business. No business is immune from unexpected shocks.

Those strategic partnerships take time to build. The founder can now let that evolve at the speed it’s going to evolve, without having to “force” it as much.

Moving to cashflow negative (misery)

You only have to drop below by $1 and you’ve crossed the line.

This business has a mixture of recurring revenue and ongoing product sales. The products are sold and then delivered each time, so it’s a case of keeping the pipe full.

Delivery is a combination of technology and people. For both business lines, margin is fairly healthy, the costs go up in a similar portion to revenue. They are also mostly fixed costs.

Last year the product sales line of business dropped dramatically.

The fixed cost base was now above the recurring revenue and the reduced product revenue. They had crossed the line into “misery”.

We’d set the budgets in June. We’d reset them by September to pull back on hiring and let attrition take it’s course to re-set the cost base.

This business was making some long term investments last year. There were two windfalls that allowed us to protect those:

- Retained earnings from the year before (the cheapest form of capital there is)

- A one time break fee from a landlord to break a lease early, plus a rent free period in the new property

Both of these gave us the time to re-set and re-build revenue back up to cashflow positive levels.

The cost base this year would rise again once the rent free period finished. It was something we were very conscious of in our planning.

Hence the misery period was short lived. It was a good reminder. It was also a time I used the Charles Dickens quote to help the business owner reach enlightenment. At least in this particular situation.