[HN Gopher] Games people play with cash flow
___________________________________________________________________
Games people play with cash flow
Author : simonebrunozzi
Score : 309 points
Date : 2022-12-30 22:28 UTC (3 days ago)
(HTM) web link (commoncog.com)
(TXT) w3m dump (commoncog.com)
| yayr wrote:
| great insight, but one point I miss is that to play games with
| cash-flow you got to have it in the first place.
|
| Some ideas really benefit from investment before a product is
| marketable (i.e. for research, production). Kickstarter etc.
| provide a great tool to generate that for consumer oriented
| products before the product is launched. There are many markets
| where this is not so simple or not possible.
| [deleted]
| stevenjgarner wrote:
| I urge those interested in cash flow games to read "The Sovereign
| State of ITT" by Anthony Sampson.
| lifeisstillgood wrote:
| >>> Once the depreciation ran out on particular systems, they
| could then sell them to another operator, where the depreciation
| clock would start anew
|
| ohhhhh!!!! Tell me that's not the reason there are so many sub-
| contractors around.
|
| That seems a complex ut doable tax code fix
| sokoloff wrote:
| It's not nearly as large a dodge as presented. Ideally the
| economic (tax) life would be similar to the practical life, but
| "depreciation allowed or allowable reduces your basis" in the
| asset, so when you sell it, you will have a gain on the sale if
| it's for more than your basis. You will be taxed on a portion
| of that which is depreciation recapture at a higher rate than
| the capital gains rate and at the capital gain rate for any
| gains above the basis plus depreciation recapture.
|
| So, the new operator gets to start depreciating from their
| basis (which is fair and right), but the old operator has a
| gain to have taxed (or delayed by a 1031 exchange). It's a cash
| flow difference in taxes as well (making it fair to include in
| the article), but not a permanent avoidance of taxation.
| caminante wrote:
| I didn't follow the article closely, but I assume the author's
| alluding to resetting the accounting/tax/depreciable basis of
| the assets with an arm's length sale.
|
| There is a tax concept using "leased employees" where you pre-
| pay for a vendor to work on-site, and it counts as an asset on
| the balance sheet. I don't think that applies to independent
| contractors.
|
| Sub-contractors are popular because
|
| 1. They don't count in key performance metrics like
| revenues/employee or liabilities (paid vacation)
|
| 2. Their costs are buried further down the income statement and
| appear as non-recurring/variable.
|
| 3. They can ramp up/down with less approvals.
| WastingMyTime89 wrote:
| There is no real fix here. The article is wrong. The effective
| tax erasure when you do that is not really significant. When
| you resell the depreciated asset, you make a profit which
| "erases" the depreciation and will have to pay taxes on that.
| You have actually just deferred your taxes. That can be
| advantageous cash flow wise but that's pretty much it.
| remote_phone wrote:
| You are repeating exactly what the article said.
| brmgb wrote:
| No, I fundamentally disagree with the idea that the clock
| is starting anew when you sell the asset. The buyer can
| start depreciating but the seller just paid taxes on the
| benefits it received from the sale which is an equivalent
| cash flow. You can in fine only depreciate once per asset.
| The whole reselling thing is bogus.
|
| There is no real tax shielding coming from depreciation. If
| you just invest to replace existing depreciated asset, you
| just reach a steady state where you indefinetly write off
| real loss of value in infrastructure and pay taxes on real
| income which is things working as they should.
|
| The real tax shielding actually comes from debts and means
| you can finance your investment in new infrastructure
| advantageously by using the tax write off. The interplay of
| debts and depreciation is not involved: that would remain
| true without any depreciation.
|
| Anyway, the point of Malone through EBIDTA wasn't about
| cash flows anyway. It was to show that if you ignored how
| new investments were financed, the company was actually
| earning money and was profitable and these profits would
| materialise as soon as the company would stop expending
| which is indeed exactly what Amazon did again years later.
|
| To get back to the article, I don't really understand what
| follows the part about Malone. If the point was that
| raising money through debts would be preferable to raising
| through capital, I would obviously have agreed but that's
| kind of obvious and startups wouldn't use VC money if they
| had access to debt anyway. Instead, he is somewhat talking
| about WCR without mentioning WCR which is weird before
| coming back to his initial argument about VC without having
| really at any point discussed the subject. What a mess.
| hef19898 wrote:
| Bring advantageous for cash flow is the whole point, isn't
| it?
| wodenokoto wrote:
| During my college course on accounting cash flow was by far the
| most difficult to understand and I still find it difficult in
| light of the cable company example.
|
| As an owner you still want money to spend. How do you get that if
| not from the profits?
| wongarsu wrote:
| If you have growing cash flow, and can plausibly show that you
| will be making profit in the next 5 years, or even better that
| you could be making profit right now if you stopped
| reinvesting, you won't have a problem getting either investors
| or a bank loan.
| gvb wrote:
| _As an owner you still want money to spend. How do you get that
| if not from the profits?_
|
| In the cable company example, from taxes (not paid) and
| accelerated depreciation (a big part of the taxes not paid).
| Money is fungible and cash is the ultimately fungible form of
| money. Tax money (not paid) is better than money taken as taxed
| profits.
|
| By running the business at a loss (from a profit/loss point of
| view), the cable company paid little or no taxes. You can take
| $100 in profit and pay $30 in taxes (net $70 in your pocket),
| or you can show $0 profit and roll that $130 into your business
| expecting $130 + growth in the future. Note that, with the
| cable company example, the cable company "was unprofitable"
| every year yet paid a compound return of 30% to its
| shareholders.
| wodenokoto wrote:
| Sure. But if I roll all revenues into the business where are
| the money to pay my personal rent and groceries as the owner?
| [deleted]
| dmurray wrote:
| You pay yourself a salary. That's the business investing
| revenue back into its employees. And yes, you'll pay income
| tax on that, but that may only be a small part of the value
| you've created.
|
| Or you sell some shares, or borrow against your equity.
| Perhaps you can roll it forward indefinitely and you're in
| a jurisdiction where your heirs get favorable tax treatment
| by inheriting the business.
| biorach wrote:
| You pay yourself a salary.
|
| The whole setup probably requires operating at a much
| larger scale than that of a sole trader or small family
| business.
| evanpw wrote:
| I had the same question while reading. It's probably obvious to
| the startup crowd, which is why it wasn't made explicit, but I
| think the trick is this: a company which will never make a
| profit is (should be) worth zero, but a company that has the
| ability to make a profit in the future is valuable, even if
| current profits are zero. So rather than making a profit and
| paying it to yourself, it's better to make the company as
| valuable as possible to other people by reinvesting everything,
| and then sell stock or borrow against it for your own
| consumption. That definitely seems true for the most prominent
| outliers, but no idea whether it's actually true for the
| average or median owner / founder.
|
| I guess this why EBITDA is important: if you have positive
| EBITDA and stop growing the business, you can pay off your
| loans, finish depreciating your existing equipment, and with
| I=D=0 you have real profits.
| chrisco255 wrote:
| Well in the cable example it was from capital investors. But
| also, since the business was pulling in cash flow it could use
| its present customer revenue to immediately reinvest in
| expanding the business. So on paper the business would show
| little to no profit, probably even negative in some years,
| while the business was actually growing at 30% a year.
|
| It's a riskier model for non-cash flow based businesses though,
| in my opinion. If you don't have a stable source of cash flow
| from something like a subscription model it's harder to count
| on revenue being consistent (unless you're dominating a
| particular market).
|
| Also can be risky if you only have one or a few clients
| providing the cash flow. If they pull out or go belly up, your
| business can be decimated with whatever overhead you added to
| provide for them.
| fedeb95 wrote:
| The author states that the incriminated blog post is perfectly
| logically constructed. That is not the case. The argument:
|
| Once you have less skin in the game, it is easier to make bad
| decisions
|
| Doesn't quantify how much it's easier, and nothing follows from
| this. It may be ok that some startups (maybe even 99%) fail
| because not having skin in the game is not right for them. This
| may filter out, globally, bad startups.
|
| But let's allow the argument to be true and that the rest
| follows. Still it's all conditional to a specific startup making
| those mistakes, being easier to make doesn't mean they are made
| consistently.
| antiterra wrote:
| The other way to think about it is that investors pitching in
| doesn't reduce your own investment. If you take out a second
| mortgage and pour all your money into your business, you've got
| the same skin in the game regardless of what investor money
| your business takes from then on out.
| rightbyte wrote:
| > Once you have less skin in the game, it is easier to make bad
| decisions
|
| Ye. It is quite ofent I am winning, get nervous, and lose. When
| playing competitions.
|
| Less skin in the game makes you cooler.
| pedrocr wrote:
| An insight I've found very useful in many areas is to separate
| cases where you're satisfying requirements versus optimizing.
|
| If you're satisfying, a single logical argument for a decision is
| enough. If you're answering the question of "How to add 10M of
| new revenue to this business?" there are many valid answers and
| you just want to test a few and land on one that's well supported
| by an argument. Then go execute that and do it all over again
| later.
|
| If you're maximizing though it's much trickier. If you're
| answering the question of "What's the ideal way to raise capital
| for this business?" a single logical argument is not enough
| because you often misrepresent the search space and end up doing
| very precise optimization of a tiny subset of options for
| example.
|
| A good option is to turn optimization problems into satisfying
| problems by specifying them more. "How can I raise capital at
| cost below X, amount above Y, in under Z months?" gives you most
| of the value of the optimization problem. It doesn't give you a
| general insight but it may even give you more value than that by
| forcing you to define your constraints properly. It's common to
| find that once you try to fill in X/Y/Z to even start working on
| hypothesis you find out not everyone has the same view. Having
| that discussion is often more valuable than any fancy generic
| optimization you could do to the problem.
| lucumo wrote:
| Thank you for sharing that insight! I've often found myself
| doing something like that.
|
| When my natural inclination is to optimize, and the smart
| decision is to satisfy, having it as explicit words will help
| me make a decision faster.
| yamrzou wrote:
| Previously (2020) : https://news.ycombinator.com/item?id=25357669
| jason_zig wrote:
| > ...You could just as well bootstrap a tiny, successful internet
| business selling Wordpress plugins or Shopify themes, believing
| that 'startups shouldn't raise capital'. You would then never
| need to update your beliefs, because those are perfectly
| sufficient for a small, independently-run business.
|
| At the scale of a one or two person show the up front costs for
| building and selling your software are pretty reasonable. This
| setup rearranges how much cash you need up front to 1. be
| competitive and 2. win over new business. True this has a cap on
| it of say... ~1-2M ARR but that's a very reasonable game for a
| lot of smart people to be playing. I didn't read the original
| article he's arguing against, but if that's the style business
| they are discussing then the "don't raise" argument holds up.
| Frankly given the original article's conclusion of "don't raise
| money" I suspect they weren't focusing a post-IPO cable
| business...
| bjornsing wrote:
| I dislike when people think incorrectly and then say "thinking
| doesn't work". In this case the final step of the 6 step argument
| chain is just incorrect thinking. The conclusion does not follow
| from the "axioms" / accepted "prepositions".
| JumpCrisscross wrote:
| This is a long-winded refutation of an article [1] that ignores
| economies of scale.
|
| [1] https://ensorial.com/2020/dont-raise-money/
| Joel_Mckay wrote:
| It is difficult to detect auto-generated content, but it also
| does not preclude the possibility an author was having a stroke
| during composition.
|
| By definition, one no longer fully owns a company when exchanging
| ownership for liquid capital (often at ridiculously discounted
| value), or lose future well-being through debt-financing
| issues/predatory-scams. Note, the often negligible incremental
| cost of scaling tech companies often offsets the expected value
| in investment risk. Every fist-year student learns Bayesian
| statistics, but Vegas was built on those who still can't assess
| risk.
|
| In general, a small service site like Craigslist operates just
| fine with minimal overhead, and has remained functional much
| longer than most startups.
|
| It was really sad seeing what Silicon Valley Bank did to startup
| culture, and naive investors that get FOMO.
|
| Happy 2023 =)
| miamowers wrote:
| The issue with the original article seems like it could be summed
| up pretty simply, startups, for their founders and investors,
| aren't meant to create profit, they are meant to increase equity.
| Therefore having the same business model as a cancerous tumor
| makes perfect sense, consume as much free resources (low interest
| debt) as possible to grow as large as possible in as short a time
| as possible, independent of any external effects or moral hazards
| that creates.
|
| So in that way at least the original article does have a point,
| in a better world startups most likely shouldn't take as much
| funding as they do, but in the current world, the correct answer
| for any particular startup will always be to do exactly that.
| draw_down wrote:
| [dead]
| svusa wrote:
| The example in the article of how the restauranteur halved his
| food costs simply by pre-paying his supplier rather than paying
| Net-120 (120 days after goods are delivered) fascinated me. Where
| exactly does the value of cash flow come from?
|
| Rehashing the example from the article: Why do restaurants pay
| Net-120? Suppose Restaurant R is buying 30-day dry-aged steak
| from Supplier S. R needs to buy the steak days in advance of
| cooking it to serve customer C. R receives money for the steak
| only after this point, and now R can pay back S.
|
| Why is pre-payment better? S can now be more efficient about the
| number of cows they have to slaughter. If R pays by Net-120, S
| ends up with a lot of waste due to unsold dry-aged steak, because
| S cannot anticipate the true demand but must be prepared to
| capture it to earn money.
|
| Analysis: In effect, S and R are pushing C to plan better. If C
| can just confirm that they want dry-aged steak ahead of time,
| which involves significant preparation, the entire supply chain
| can be more efficient. Sometimes, planning ahead is a benefit for
| C, as landing reservations at top restaurants can be difficult.
| Other times, C does want the ability to make last-minute
| decisions on where to go for food.
|
| Meanwhile, S can do something better than slaughter the cows that
| would have gone to waste. In essence, S has more freedom because
| S has more cash flow. So does more cash flow == more freedom?
|
| Cash is the most liquid asset. Supposedly, it represents the
| value that you can transfer immediately. I can have all the cash
| in the world, but if I am bound to pay a ton of debt with that
| cash, do I really have the ability to use the cash for something
| I value? That's why cash flow is a separate, and more useful,
| concept.
|
| One argument against "cash flow == freedom" is that cash flow can
| be a function of effort. If I spend all of my waking hours
| working, I will generate cash flow, but I won't get to enjoy
| anything. What about landlords who don't have to do much to earn
| cash? Well, cash flow in strict $ terms doesn't capture
| everything. Businesses don't have this problem because they can
| simply capture the effort for producing cash flow in terms of
| wages. A simple trick is to pin a cash value for the amount of
| time I spend.
|
| Cash flow represents freedom because cash flow = value in - value
| out at a given point of time. You don't even need to use USD for
| the "cash" part of cash flow, if that's not what you value. Then,
| to increase cash flow, you can 1) strictly increase "value in"
| (e.g. work more), 2) strictly decrease "value out" (e.g. delegate
| a task to free up your time), or 3) increase "value in" more than
| "value out" for a single transaction (e.g. take out a loan).
| Increasing cash flow doesn't need to be immediate: you can work
| on an asset and incur negative cash flow initially to establish
| better long-term cash flow. Worse "value in - value out" now for
| a better "value in - value out" in the future.
|
| It's neat to see how to apply accounting principles to optimize
| my day-to-day.
| _glass wrote:
| I love it that it concludes with what is called abduction in my
| field of academia. So in general you would have deduction, you
| reason from a set of principles, or induction, you reason from
| specific instances towards the principles. Abduction is like
| induction, but that you find a completely new type of principles,
| unknown before.
| adql wrote:
| > At first glance, there doesn't seem to be anything that's
| explicitly wrong with this argument. I agree with all the base
| ideas, and I found myself nodding to the intermediate
| propositions. The logical correctness of the argument wasn't a
| problem. No, my unease stemmed from experience: I knew this
| wasn't the right way to think about raising capital. But I
| couldn't begin to construct an argument that went against it.
|
| The original argument could be very easily argued - you just
| might not have enough money to get your foot in target market in
| the first place and not every business can be stared by single
| person and some savings anymore.
|
| I don't see why author of article didn't just do that instead of
| pages of arrogant faffing because he got offended he couldn't
| invent a counter-argument to _a_ (not only one, just one) way to
| make sensible business that many people succeeded just fine
| utilizing
| sarchertech wrote:
| If you read the original article, the author says right at the
| beginning that of course some startups should raise money.
|
| The original argument was just that it shouldn't be the default
| position.
| ilyt wrote:
| Right but that makes this rambling even more pointless.
|
| It's as if author just doesn't have any sensible reasoning
| for his gut feeling that "startups should raise money by
| default" then is annoyed that he can't produce anything
| sensible on the topic but someone else can produce reasonable
| argumentation for opposite, then started giving up random
| examples of how not-startups companies use cash flow, and
| nothing there was really related to original topic on how to
| start and grow your startup.
|
| And all of the examples fit nicely into hard to get/expensive
| to get markets that need a bunch of money upfront
|
| > I'm not suggesting that there are never reasons to take
| outside investment. Obviously there are. But, we should
| recognise that doing so comes with significant trade-offs and
| difficulties that mean it shouldn't necessarily be the
| default.
|
| that the original article suggested.
| IshKebab wrote:
| > pages of arrogant faffing
|
| Good description. If you have a point to make, make it!
| ourmandave wrote:
| Now I have the Spinners song _Games People Play_ stuck in my
| head.
|
| https://www.youtube.com/watch?v=vbkg1WXf594
|
| At least it's not _Holly Jolly Christmas._
| [deleted]
| davedx wrote:
| Eye-opening essay. I think this should be essential reading for
| any investor or business owner.
| igammarays wrote:
| Yes, and as I've learned the hard way, even a bootstrapped one-
| man-SaaS can use cashflow tricks to run a much more successful
| business.
| tw98521358 wrote:
| It actually Makes the most sense to mess with cash flow when
| you are small and scrappy and your loan terms are unfavorable.
|
| Megacorp can get a loan for significantly more favorable terms
| so the cost of financing is much lower on their end. As such it
| would be slightly advantageous for them to pay quickly and ask
| for a discount. Unfortunately the net benefit is small for mega
| corp and they usually can't capture the savings
| MattJ100 wrote:
| I'd find practical learnings from a bootstrapped one-man SaaS
| far more valuable than the examples used in the original post
| (all more large-scale companies with more room for
| refactoring).
|
| Any specific insights you can share?
| ritzaco wrote:
| This is a bunch of rhetoric dressed up as logic hidden by using
| long paragraphs. If you break it down and remove the repetition
| it is basically saying:
|
| 1. the other guy made some argument
|
| 2. but he was just too ignorant to understand why his argument
| was wrong
|
| 3. I am smart and I do SENSEMAKING
|
| 4. therefore other guy's argument is wrong
|
| As far as I can tell, the actual first argument is something
| along the lines of
|
| 1. many founders raise capital and waste it because it's not
| "their money" so they part ways with it more easily
|
| 2. this leads to failed businesses
|
| 3. therefore founders should not raise money
|
| and the counter argument is
|
| 1. some businesses need upfront capital and the returns only come
| later
|
| 2. some founders can raise capital and use it effectively,
| instead of wasting it, even though it isn't "their money"
|
| 3. therefore founders should raise money
|
| which are both good arguments and in no way contradict each
| other. I have seen founders do both, and it's true that some
| money is raised when it was not needed, and some money is raised
| and then squandered, and some money is raised and used
| effectively to generate massive returns. That's why it's called
| "venture" capital.
| [deleted]
| [deleted]
| ShittyKickflips wrote:
| I agree with you, got same feeling from reading. When i hear
| question should I raise only right answer is: it depends, what
| is your context?
|
| But I guess it is hard to sound smart this way :)
| Inhibit wrote:
| Smart or not it's hard to make ad revenue (or get readers,
| whatever the author's going for) with a concise summary or a
| context heavy conversation.
| FlyingAvatar wrote:
| Thanks for writing this. This was my sentiment as well.
|
| I feel that the anecdotes about cash flow are somewhat
| interesting, but the whole 'proving an argument' narrative is
| unsubstantiable fluff.
|
| The cash flow strategies are things which can be leveraged in
| specific situations, but are generally not global truths that
| most early stage startups can action on.
| kardianos wrote:
| No, his argument is that you should not say "new companies
| should not go into debt".
|
| His financial advice is "don't think about the amount or the
| debt, but think about the cash flow analysis."
|
| He goes on to state that many new companies won't need to go
| into debt to be successful along the terms the founds define
| them.
|
| You are presenting a straw-man argument. He even says, it isn't
| that the argument is wrong, but that there are better (more
| complete) frames to examine this problem. Your point (4) is
| literally false.
| lumost wrote:
| When I work with my own money, I'm often overly cautious. I'm
| currently agonizing over whether to drop 1k on cloud credits to
| see if something is viable.
|
| If such a decision on 1k took a week in a real startup which
| blocked a whole team at 10k/head... then there wouldn't be much
| startup in the future.
|
| Founders waste money because they need to move fast. Sometimes
| the need for speed also means that they do seemingly foolish
| things, you can be right or fast - sometimes being slow is
| wrong.
| sicp-enjoyer wrote:
| The other weird part of this article is it's presented as the
| author's unique (or uncommon) business/startup insight, when
| cash flow analysis is the fundamental of finance.
| ms7892 wrote:
| [dead]
| oasisbob wrote:
| > This is a bunch of rhetoric dressed up as logic hidden by
| using long paragraphs
|
| Rhetoric is the classical art of persuasion. Were you trying to
| say "empty rhetoric" or to describe the argument as being poor?
| Describing a poor argument as "rhetoric" is like calling an old
| unreliable car "engineered".
|
| Logos is part of rhetoric, not aside it.
| concordDance wrote:
| That might be what you think that word means, but it doesn't
| match the common usage (at least in my experience), nor the
| clear intent of the parent.
| oasisbob wrote:
| Rhetoric is commonly introduced this way in college
| composition courses. Here's a good approachable
| introduction:
|
| https://pressbooks.ulib.csuohio.edu/csu-fyw-
| rhetoric/chapter...
|
| Typically when I hear the word rhetoric used in the way
| you're defending, as a pejorative autoantonym, it's by
| political talking-heads trying to dismiss an argument of an
| opponent.
| concordDance wrote:
| What would you say is the ratio between usage in the
| official meaning and usage in the manner of the great
| grandparent? I would expect 1 to 10 at least.
| weakfortress wrote:
| [dead]
| d_e_solomon wrote:
| The other side of the cash flow game is that you can be cash flow
| positive most of the time... but go out of business if you face
| occasional, large often complicated fixed costs. A robust
| accounting and pricing model is needed to plan for those fixed
| costs. It's like picking up pennies in front of a steamrolller if
| you only focus on short term cash flow.
|
| The other interesting example of cash flow games is Warren
| Buffet's focus on insurance. He really likes picking up people's
| premium payments and collecting interest on them until the claims
| hit. My limited understanding is that Buffet looks for those
| situations specifically.
| scrappyjoe wrote:
| Buffet uses the held premiums - called _float_ - to invest in
| assets which generate a higher than required return for the
| eventual insurance claims.
|
| The way he sees it, the float is an interest free loan that you
| never have to pay back, as long as your incoming premiums each
| year are roughly equivalent to your outgoing claims each year.
| His strategy is to use this interest free loan to generate as
| high a return as possible, which he can then cream off the top
| for shareholders.
| kqr wrote:
| But it's only possible when you're well-capitalised and not
| as dependent on cash flows. See also the Kelly criterion,
| which makes it logical for one actor to offer and another to
| pay for insurance, despite the fact that both sides cannot
| have positive EV.
| ardel95 wrote:
| I really enjoyed the article.
|
| The only thing that stood out was that the argument the author
| set out to dispel had a much simpler flaw. In the original
| argument, point number 3 (having less skin in the game leads to
| bad decisions) is the weakest one.
|
| That statement isn't really a first principles fact, but at best
| a hypothesis. IMO, not even a good one. For all we know, having
| less extreme exposure may lead to better decisions, as the
| founder may be open to more calculated risks. And even IF true
| that statement doesn't address the tradeoffs: maybe bad decisions
| are outweighed by the ability to outrun the competitors due to
| influx of extra cash.
|
| While there is certainly some correlation in such arguments, the
| bar for proving causation needs to be much higher than a pithy
| statement.
|
| All that being said, I really enjoyed the rest of the argument.
| balderdash wrote:
| I agree. 1) because the company took outside money does not
| decrease your skin in the game (if substantially all of your
| net worth was in the company before a funding round, and it was
| all primary capital raised, then you're still "all in"). 2)
| when people are over invested exposed, their risk tolerance
| typically goes down not up (even if the payoffs have high
| expected returns)
| coding123 wrote:
| This makes sense to me. I am trying to build a house, and I have
| recently hit a funding issue. My cash flow is the problem. I want
| to take on more debt to get it done, but to do that makes me
| starve. So my solution is to get a better paying job so that my
| cash flow clears up and the debt is easier to manage. The debts
| are not huge, just lots of short term loans that clear up in a
| few months. Doing this without a mortgage but with lots of small
| temporary loans looks a lot like this. The end result is a house
| that should cost $300k for more like $100k.
| birdyrooster wrote:
| The most glaring and obvious problem with this model is that your
| customers are paying for all of your investment. If you can't
| invest large or fast enough to provide benefits your customers
| need, they will most certainly leave. The second most glaring
| flaw is that the shortest path to what the customer wants does
| not lead to Macintosh or iPod or Watch. Big ideas need big
| investment before customers come around to the idea.
|
| This articles wastes too much time on its appeal to personal
| incredulity when the answers are so obvious.
| mwill wrote:
| Relating to cash flow and payment terms, my company (outside of
| tech) has a particularly large client (rev >$2B AUD, 10k
| employees worldwide) that has us on 45 days EOM, but accounts
| team won't accept an invoice without a ref#, which are given by
| the "receipting team" after site confirms work is completed
|
| The mysterious "receipting team" is not in the main office, and
| has no phone number or even names listed, emails are never
| directly replied to, instead site contacts will call to relay
| questions/answers from them, ref# come from an automated do-not-
| reply email. They will quite often be "backlogged" and fail to
| send a ref# before the the end of the month, and suddenly will be
| cleared up on the 1st of the month.
|
| We've had jobs that finished in the first week of a month, been
| ignored for 25 days, received a ref# with an apology for the
| delay on the 1st of the following month, get paid 45 days end of
| _that_ month. So up to 100 days from completing work to getting
| paid. All our accounts are POS, 7 days EOM, or 30 days EOM, and
| must be paid on time or we lose supply. So to do a job with $100k
| of materials and wages for them, we have to have $100k spare cash
| for up to 60-100 days
|
| It's not a cashflow problem, they're sitting on reserves and
| we're a blip on their radar, less than 1/10th of a percent of
| their outgoings
|
| So we quote them outrageously high, and they never blink. I've
| told them some jobs would be up to 50% less if they paid quicker,
| and they've outright said they'd rather hold the cash and pay
| more. For a sense of scale we've invoiced them about $500k a year
| for the last few years, they've told me to clear out a couple
| weeks for two jobs that are nearly that much _each_ , in February
| and April this year. I can't figure out who's getting the bad
| deal, them or me, I keep assuming they must have some massive
| upside I'm not seeing -\\_(tsu)_/-
| kccqzy wrote:
| This is an area where banks can help. A bank can loan you the
| money immediately after the job is done with a low-ish interest
| rate (since your client is publicly traded and reputable and
| presumably highly creditworthy) and then ask for repayment only
| when the 45 days EOM is up. Alternatively you just ask the bank
| for a fraction of the invoice amount upfront and not think
| about paying interest to the bank any more. It's called invoice
| factoring.
| AussieWog93 wrote:
| >I keep assuming they must have some massive upside I'm not
| seeing -\\_(tsu)_/-
|
| There is a massive upside for the person you're talking to in
| accounts payable.
|
| By making the whole tender process ridiculous, they get to hold
| onto their bullshit job.
|
| I've found similar things when dealing with corporates. They'll
| never try to negotiate the price down, but they'll be damned if
| they don't get to rack up their Amex points. :)
|
| The golden rule I keep in mind is that you're never speaking to
| a company - instead, you're dealing with a human.
| sokoloff wrote:
| If you can swing the cash flow, keep billing them at a rate
| that makes sense for your business. So many AP departments are
| incentivized on payment delays. Let them "win" their stupid
| game and just build the cost plus some extra into your rates.
| mwill wrote:
| Yeah thankfully we can swing it, but we've actually turned
| down some work for other clients here and there because I've
| done the math and figured there was too much overlap/risk
| with this particular clients jobs.
| bruce511 wrote:
| You're both getting what you want, but you are different
| businesses, so you are optimizing for different things.
|
| In other words, you have a business of a certain size with a
| certain set of constraints and goals. For most small businesses
| the constraint is not enough money, and the goal is to make
| more money.
|
| Naturally you see your client as a "big version of your
| business" and therefore you think they are optimizing to the
| same goals as you. When interacting with corporates this is a
| really common mistake.
|
| What's really happening is that to them they have all the cash
| in the world. The difference between 30k and 150k is nothing.
| Literally nothing.
|
| However they likely have incomings and outgoings totally
| hundreds of millions, if not billions, each month. When you
| move that much money some jobs are likely to be _really_ big,
| and doing it right the first time I'd important.
|
| So they have a buying, and paying, process. That process is
| optimised for say 50M and up. But the process applied to all
| purchasing, they want 1 process, not 3 or 5 or 10.
|
| Your tiny rounding error if a job is therefore irrelevant.
| Money is not the limit. They want to use their process. Andif
| you are happy to wait 100 days, then they are happy to spend
| more.
|
| Would you rather spend 30c now, with a bunch of hassle, or
| $1.50 in 3 months time with zero hassle. Since $1.50 is
| nothing, you're happy to pay more for no hassles.
|
| Neither of you are getting a bad deal, and yes they are getting
| upside you can't see. You are playing to one set of rules, bug
| they have a very different rule book.
| B-Con wrote:
| This is an incredibly realistic and pragmatic take on how
| large companies work.
|
| > You're both getting what you want, but you are different
| businesses, so you are optimizing for different things. [...]
|
| > The difference between 30k and 150k is nothing. Literally
| nothing. [...]
|
| > Would you rather spend 30c now, with a bunch of hassle, or
| $1.50 in 3 months time with zero hassle.
|
| Anyone who struggles to understand why corporations do what
| they do should internalize this thought process. It explains
| a lot.
| qprofyeh wrote:
| So I assume if they hired someone cheap who's only job is
| to manage OPs account payments, and they did this for
| perhaps 100 other accounts (manager per account), they'd
| still make millions profit extra, yearly? I indeed struggle
| to understand why anyone is leaving that on the table.
| tgsovlerkhgsel wrote:
| Business payment terms, and more importantly their handling
| (read: usually ignoring) seem bonkers to me. I understand why
| net-something makes sense, but the apparently universal
| tendency to agree to a term then routinely pay an arbitrary
| time later seems crazy. I just don't understand how it became
| so normalized.
| kwhitefoot wrote:
| I suspect that it happens because of the asymmetrical power
| relationships between the customer and supplier. The
| suppliers are typically too small to have the option to sue.
| Perhaps the solution is to make this kind of breach of
| contract a strict liability criminal offence!
| ncallaway wrote:
| A better solution is to negotiate the late payment penalty
| in the contract itself, then just add the late payment
| penalty as a line item on future invoices.
|
| Don't put it on the invoice of payment is close to on time,
| and waive the first late payment (if the other payments are
| close to on time). When waiving it, put the late payment
| fee in the invoice and and another line item waiving it. In
| whatever communication channel you send the invoice, note
| that they had a late payment, and that since it's the first
| time you've waived it.
| Denvercoder9 wrote:
| > I keep assuming they must have some massive upside I'm not
| seeing
|
| My default assumption would not be that there's an upside in
| this for them, but that they're a disfunctional organization.
| The people procuring your services and authorizing the expense
| are not in contact with or unable to influence the people
| planning and authorizing the payment. They might not even share
| a superior all the way up to the board, with the procurement
| people reporting to the COO and the payment people to the CFO.
| If it's easier to spend the company's money than to save it,
| people will spend it. Corporate seldom rewards saving money
| anyway.
| dazc wrote:
| Based on previous experience, I concur. There are businesses
| with a culture of 'pay late no matter what' and this becomes
| the norm, regardless of logic.
|
| I had a manager who could buy just about anything he wanted
| with no checks as to why he needed this stuff or where it
| went. The only control was the time period between delivery
| and payment.
| mathattack wrote:
| 2 logical options:
|
| 1) They aren't as fiscally sound as you think.
|
| 2) They've sub optimized and someone is looking very good for
| stretching payment terms at the expense of the rest of the
| company. Once they do this it can be hard to walk back as
| someone centrally has to justify more working capital.
| chrisdhoover wrote:
| Or their accounting department is not great. Most accounting
| departments I have worked with were not great.
| mwill wrote:
| I'm pretty confident on their soundness, they're publicly
| traded and I check up on clients lodgings when I can, to
| manage my exposure, they claim to be sitting on $400M in cash
| and $200M in minerals as of a few months ago.
|
| Option 2 seems plausible, a couple years ago they had a bit
| of internal politics that we were caught in the middle of,
| the end result was changing the engineering requirements
| going forward over _purely cosmetic_ issues, doubling the
| price of materials. One particular job we did in 2019 for
| $30k, was $150k in 2022, for the same exact end result for
| the workers, at the same site, right next to the previous
| one. The site manager complained, and I said if he got it in
| writing that they wanted to use the old engineering and
| disregard the cosmetics, it 'd be $30k and take 2 days less,
| and he said they needed it done ASAP, it'd be faster to
| convince capex to pay the $150k than it would be to start
| another round of discussions on the engineering.
| caminante wrote:
| This is business process dysfunction, and I bet their AP/AR
| spend management software was setup wrong.
|
| They can try to spin it as a free loan from you or the ROI
| gain of running a leaning team, but they're paying 400%
| more (150k v. 30k) in a current reporting period.
|
| Nothing clever.
|
| You're also sticking around and not getting burned out of
| repeat business. I like increasing prices to compensate and
| being upfront.
| [deleted]
| yellow_lead wrote:
| > it'd be $30k and take 2 days less, and he said they
| needed it done ASAP, it'd be faster to convince capex to
| pay the $150k than it would be to start another round of
| discussions on the engineering.
|
| ouch. This kind of situation could benefit from a cost
| savings program at that company.
| mikepurvis wrote:
| I'm genuinely curious at how a top-down initiative could
| succeed at rooting out this type of waste. Without
| empowering the cost savings to speak directly to the
| vendor, it's hard to imagine them being able to discover
| that paying a month or two sooner could get them non-FU
| pricing.
| twic wrote:
| Does "lodgings" mean something like "filings" in Australian
| English? As in documents lodged with the official somebody
| or other? Or are you snooping on their houses?
| btown wrote:
| No idea about the original post, but property real estate
| values for customer addresses can be an invaluable signal
| for confirming potential fraud, in the presence of other
| yellow flags on a high-end consumer transaction!
| lazyasciiart wrote:
| Yes, you lodge tax returns with the ATO.
| theptip wrote:
| Both of these are reasonable guesses. A slight variant on 2
| is that they are actually just a mess; lots of big companies
| have bad accounts payable teams. It's typically not something
| where the CFO is measuring team efficacy based on
| supplier/vendor satisfaction. You could say this is another
| way of putting "sun optimized", but it doesn't even need
| someone to be actively trying to stretch terms (though that
| absolutely happens too).
| HWR_14 wrote:
| There are a lot of things within (2) that are still
| reasonable.
|
| For instance, the contracting officer may have to fill out
| one form for a $500,000 project that they can approve, but
| approving any kind of different payment terms requires more
| levels of approval. Sure, it doesn't make sense in this
| instance, but maybe the rule makes a lot of sense with a far
| bigger contractor. As the OP said, they are a blip. Making
| rules that work well for 95% of the time and end up doubling
| the cost of the 5% is rational.
|
| More options:
|
| 3) There are tax advantages to higher costs of services and
| lower costs of debt servicing that make it advantageous to
| pay more for a good with better terms.
|
| 4) It's literally not worth the time to optimize. They
| planned for this cost and it's a blip so who cares if it's
| double the cost. I mean, someone should care, but who
| actually gets the benefit. Think about it like not cancelling
| a subscription or not renegotiating every time a contract is
| up in personal life.
| Mistletoe wrote:
| Is there a #3? Investors are paying for this inefficiency and
| the money is still coming in/there "for now"?
| bombcar wrote:
| This is why you don't have to fire all annoying customers -
| just start raising the prices on them to insane levels
| ericlewis wrote:
| My grandfather referred to this as the "asshole tax".
| emptysands wrote:
| Cash can be both capital and operating funds. They may want to
| keep certain debt ratios and are not worried about impact on
| net income.
| stevenjgarner wrote:
| A fun "thought" experiment? Given the time of year (just after a
| fiscal quarter/year end) and given that I am a dual citizen (New
| Zealand and USA), I found the following demonstration
| particularly intriguing: a bank customer (friend) had some not
| insignificant funds in several personal accounts in their NZ
| banks as of December 31st. At 10 am on Sunday, January 1st (NZ
| time), it was "still" 3 pm Saturday, December 31st in the central
| time zone in the US. I watched as they withdrew a large amount of
| USD cash from multiple debit cards on their NZ accounts at some
| midwestern ATM machine(s), then turn around and deposit said cash
| into their US bank accounts.
|
| Net effect: their net worth showed accumulated fiscal year-end
| bank balances of twice the "not insignificant amount of funds"
| (according to cash methods of GAAP).
|
| They went on to hint at the fact there are 24 time zones on this
| planet (more actually). I asked about the legality of such
| antics. They said they were not sure other than any obvious fraud
| on using such financial statements for any fraudulent financial
| benefit. They explained how the daily batch processing of bank
| transactions hurt customers real time cash flow, and felt it was
| one way to rectify things to the customer advantage.
|
| Hmmmm
| fiestaman wrote:
| Layman here: what are the consequences of having a net worth of
| accumulated fiscal year-end bank balances of twice the "not
| insignificant amount of funds"?
| hef19898 wrote:
| It is funny how many old and traditional companies fail to see
| the importance of cash flow as well. Especially those with
| traditionally high profit margins and long lead times, as the
| matgin allowed them to finance thr necessary cash flow through
| banks. All fine and well, until margin break away.
| DavidPeiffer wrote:
| A former coworker mentioned a prior job at a major food
| manufacturer. Apparently somebody realized they could mail the
| checks from across the country and still adhere to their
| payment terms. The extra day or two in the mail was worth
| pretty big money for the minimal effort required.
|
| I understand the rationale behind cash flow management, but
| I've always been a bit annoyed at the games around payment
| terms. It just feels like a chain of all companies lagging
| payment to suppliers while expecting (or hoping) for prompt
| payment from their customers. I'm curious what the world would
| look like if everyone was expected/required to pay within 2
| weeks of services rendered?
|
| You might have payment terms agreed upon, but a megacorp has no
| issue delaying payment an extra 60 days and will cut a check
| for the original amount without agreed upon late fees included.
| Then a smaller company is left trying to manage the
| relationship after their margins are arbitrarily slashed.
| hnbad wrote:
| I've literally had contractors working for certain BigCos
| tell me the companies insist on a 90 day due date on all
| invoices (at the end of the month of services rendered, ofc)
| and will still always be late on payments because they know
| that they can get away with it.
| JumpCrisscross wrote:
| > _curious what the world would look like if everyone was
| expected /required to pay within 2 weeks of services
| rendered?_
|
| You'd need to generate credit through the financial system
| versus trade at some nodes.
|
| Consider a diner. It orders ingredients. Adds value to them.
| Serves and collects payment. Let's enforce instantaneous
| payment on this system. Now the diner has to borrow to buy
| ingredients. Or maybe it pre-sells "tickets." The way some
| high-end restaurants do. Now the customer is financing them.
| If they don't have credit, maybe this encourages their
| employee to pay them earlier. _Et cetera_.
| hef19898 wrote:
| Cash flow is _so much more_ than just payment terms.
| bgribble wrote:
| This was a painful learning for me when I worked for a
| megacorp: the bigger the customer, the less likely to pay on
| time.
|
| For me as an engineering manager at the "big customer" it was
| a constant embarrassment. We worked with small scrappy
| vendors who I was on a first-name basis with. Megacorp would
| just never cut the checks. They would negotiate super
| aggressive terms to start with and then still intentionally
| not meet the agreed terms. I had close collaborators telling
| me they really needed the $$ to meet their own bills and all
| I could say was "I'll send another email to purchasing and
| hope for the best!" Hated that so much.
| jhpaul wrote:
| I had a similar experience at a mid-sized nonprofit. We
| would get generous pricing from vendors with reasonable
| terms, then the next time around I would find we were 5
| months late paying them. The internal answer was "cash
| flow" and "well we wouldn't want to pay them too quickly",
| or worse "they shouldn't be complaining, they got their
| check much faster than X"
| hef19898 wrote:
| Clever use of your payment terms is a valid strategy. Not
| respecting the agreed upon payment terms is bad business
| behavior, using cash flow as an excuse is just lazy. Or
| worse, a clear sign of financial trouble.
| quickthrower2 wrote:
| Why not charge $big-customer more to compensate? Or avoid
| them altogether?
| dboreham wrote:
| This is standard practice, but some vendors are
| inexperienced.
| bgribble wrote:
| I _was_ the big customer, I was just powerless as a cog
| in the machine to make my employer pay on time.
|
| As the scrappy vendor, landing those big accounts is so
| important that you will take the risk even if it kills
| your business :(
| BeFlatXIII wrote:
| Now you have me smiling while imagine a future where someone
| crashes the world economy by messing with the cash flow
| games.
| [deleted]
| quickthrower2 wrote:
| > Once you have less skin in the game, it is easier to make bad
| decisions. The author argues this is due to a) having a capital
| buffer to cushion you, and b) having more time to waste.
|
| I don't see how it follows. People may make worse "penny-wise
| pound-foolish" decisions when it is their own money. Using done
| by hand SEO instead of ads to save money for example and it
| taking longer to get customers, as a made up example.
| imtringued wrote:
| There are upsides to raising capital which haven't been
| addressed by the article that argues against raising capital.
| nmfisher wrote:
| In your made-up example, though, the SEO may build a long-term
| pipeline whereas the ads are one-and-done. That's without
| mentioning the mentality foisted on companies to "just show
| user growth in the next quarter, don't worry about
| profitability".
|
| The devil's in the details.
| kqr wrote:
| It follows, if nothing else, by selection bias. The
| organisations that did not take on investment and subsequently
| made bad decisions based on flawed assumptions don't stick
| around for as long to make further mistakes on the same
| assumptions.
| CPLX wrote:
| Yes the original premise he's trying to refute can be dismissed
| far more easily.
|
| That argument has as a premise that taking on investment
| increases risk. For the most part that's simply not true,
| having more money in hand reduces risk for a business.
| blitzar wrote:
| > taking on investment
|
| Also means (generally) finding someone to invest, which
| (generally) means getting your head around your business what
| you do, what you are going to do next, and what you are going
| to do with the money, a plan one might say. This plan is then
| considered by the investing party and if it is total
| nonsense, no investment.
| maCDzP wrote:
| This was a great essay. Does anyone subscribe to commoncog - is
| it worth it?
|
| Compared to just getting books from libgen?
| rossdavidh wrote:
| I couldn't make it through this (rather long) article, in part
| because a lot of it seemed to take as a given that you could
| predict interest rate movements. There are, probably, a large #
| of companies out there right now who have made keeping a large
| debt load part of their way of doing business, who are right now
| starting to find out that this makes them fragile.
|
| Nassim Nicholas Taleb, a grumpy guy who nonetheless makes some
| good points sometimes, said debt was a way to "fragilize". Like
| Just-In-Time manufacturing, it can make sense up to a point, but
| is often taken way further, to the point of being a bet that
| nothing in your environment will change.
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