Tuesday, December 4, 2012

Show Me the Cash!

I remember the moment well.  I had just reviewed the P&L and things were looking good.  The business was healthy.  Sales were up.  Expenses were down.  Projections were being hit.  Everything was moving in the right direction.  I smiled. 

And then, our Controller walked into my office and said: (numbers fictitious)

“We have a problem.  I have $40k of bills on my desk and payroll is due this week, and we only have $80k in the bank.”

I thought of a phrase I’d heard a thousand times, and at this moment, I finally understood it:

A quick look at the balance sheet showed a monstrous Accounts Receivable number.  Yes, sales were up and expenses were down, as the P&L showed.  But people weren’t paying us on time.  Revenue reported as sales wasn’t showing up as cash in our bank account. 

Thankfully we were at a stage with the company where we could weather the storm.   We have always been diligent about keeping the company debt-free so it’s easy enough for us to get a credit line from a bank or a short-term loan from investors if need be.

However, many early stage companies don’t have this luxury.  Cash in the bank is their life blood.  Run out and you’re done.  You can have a stack of purchase orders and a P&L that makes you feel like a rock star, but without cash you’ve got nothing.  Seems simple enough.  But, in my experience, it’s often overlooked.  And I’ve been guilty myself.

In my situation, cash flow comes from the royalties paid by our franchisees.  We establish our operating budget based on them.  If franchisees are late with their payments to us, we have a problem.  Often, it’s the result of a trickle-down effect – the franchisees’ customers are late in paying them so they’re late in paying us.  The cash flow problem runs downstream.

Which is why I encourage entrepreneurs, franchise candidates and early stage business owners to do two things:
  1. Start with more cash than you think – like 2-3x
  2. Establish a culture with customers of prepayment or 30 day term maximums (with a sizable down payment) from the outset and be ruthless about enforcing it
We were way too laid back in the beginning about Accounts Receivable.  Our mentality was – “we want our franchisees to know that we have their backs and if that means delaying a payment to help them out, so be it.”  The problem was that the effect was the exact opposite of our intent.  It created debt-ridden franchisees, put the company as a whole at risk, and penalized the franchisees who were paying on time as they didn’t get all the services/products they otherwise would have had we had more money to invest in projects and infrastructure.

We’ve been working for years to turn around this mentality.  But culture is hard to change.  It takes a lot of time and energy.  It’s much better to establish a good one from the outset.  My suggestion for how to do so is threefold:

1) If you’re launching a company, start with as much cash as possible.  Make sure to add a “cash flow” line to your pro forma to see how much you’ll need.  Then double it.

2) If you’re in revenue and signing up customers, get them to pay as much as possible up front and be adamant that they meet your financing terms.

3) And if you’re in the throes of running a small business, give cash flow as much (if not more) attention than sales and income.

Because at the end of the day, cash really is king.  And it’s the type of lesson you don't want to learn the hard way.

Wednesday, October 31, 2012

Does Buying a Franchise Guarantee Success?

I was talking to someone recently who’s interested in purchasing a TGA franchise when he made a statement that encapsulated several thoughts I’ve been having:

“I get it – I’m not buying a business, I’m buying a system.”

I couldn’t agree more.

I believe that the purpose of buying a franchise is threefold:

Get a developed system in a proven market that operates like a well-oiled machine so you’re setup for success from the outset.

Get a recognizable brand that is growing exponentially due to HQ building it nationally/globally and franchisees building it locally.

Get access to the intellectual capital and support of a tight-knit family that includes HQ members and fellow franchisees.

In my opinion, it is rare that our “system” doesn’t work in a given area.  All territories have their niches that require slight modifications, but the system as a whole is highly transferable from one area to the next.  That’s the point of franchising.

When I look at TGA’s most successful franchises, they didn’t get there because of the system.  They got there because of themselves.  TGA provided a system that works, but that’s our job and that’s why we’re paid franchise fees and royalties.  It was the franchisee who took the system and made it a successful business.

At TGA, we have a concept called the “Recipe for Success” that asks three questions on a scale of 1-10:
  1.  How hard are you working?
  2. How closely are you following the model?
  3. How well are you engaging the network?

It’s almost universal that franchisees who score high on these questions are doing well and the folks who don’t are not.  This list translates well to non-franchised businesses as well … you’d just need to add questions about product and market.

People often mistake buying a franchise with buying success.  It’s a big mistake to make as it can lead to (among other things) complacency.  Building a business is hard, whether it’s a franchise or not, and success comes down to your ability to execute.  

Buying a franchise tilts the odds in your favor as it provides a proven market, developed product and successful system.  But, if you ever consider investing in a franchise, I encourage you to do so with the understanding that it is ultimately up to you to take these things and turn them into a successful business. 

Wednesday, October 24, 2012

Are Your Competitors Really Who You Think They Are?

Back in 2004 when I started with TGA, I had an Outlook folder titled “Competition” where I would put emails/information related to other junior golf programs.  I chuckle about it now as it demonstrates how little I initially understood the business I was about to spend the next 8+ years helping to build.

I’m asked daily about TGA’s competition.  Usually the question comes from a franchise candidate and goes something like this – “My city has a First Tee chapter and several local golf facilities have good junior programs.  How does TGA compare with these competitors?  Can the business be successful coexisting with them?”

As TGA grew in size and scope, it became clear that our market was not the same as The First Tee’s. They are a non-profit focused predominately on programs for under-resourced youth that emphasize life skills and take place at golf facilities.  TGA is a for-profit focused predominately on parent-funded programs for middle/upper income youth that emphasize "enrichment" and take place at elementary schools.  Both causes are important and needed, but besides having golf as the common denominator, they’re very different.  TGA franchisees overlap with First Tee chapters across the country and our paths almost never cross.

It also became clear that TGA’s market was not the same as a golf facility's.  When a golf course holds a junior program, almost all of the kids who register have played golf before and/or come from golfing families where mom or dad has taken an active interest in getting them into the game.   When TGA offers our enrichment program at a school, almost all of the kids who register have never played golf before and come from non-golfing families – meaning, they’re not the ones showing up at the local golf facility.

At TGA, we’re not focused on competing for the 2.4 million kids who play golf but rather on capturing the 74 million kids who don't.  As a result, our competition does not come from other golf organizations or programs.

We compete for kids’ limited time and parents’ limited budget.  When parents make their purchase decision with TGA, they’re comparing us to karate and chess club and art class and soccer and basketball and drama and the many other activities available to kids.  That's our competition.  They are not analyzing whether they should sign up for TGA or The First Tee or the program at the local golf club.

And that, to me, represents three important things:
  1. It’s a great example of the entrepreneurial journey and how your “competition” folder can end up looking nothing like it did in the beginning.
  2. We have made important strides at TGA to become more razor-focused on who we serve, why we matter and what we want to accomplish.
  3.  There is a staggering number of kids in the U.S. not playing golf and we should all be obsessively focused on bringing the game to them as that is where the true opportunity exists.

Knowing your competition is a crucial element of understanding where you fit into the industry ecosystem.  A business professor once said something along the lines of – “if you can’t identify and describe your competition within 30 seconds of being asked, you don’t understand your business.” 

Eight years ago, I had no clue.  Most entrepreneurs don’t.  That’s what the entrepreneurial journey is all about.  Thankfully we have a great team at TGA that figured it out together and did so fast enough that I'm able to write this blog from TGA’s office as the COO. 

And with that, now I must get back to figuring out how to strengthen TGA’s value proposition against swim class, gymnastics, baseball, music lessons and cooking class.