https://youtu.be/6pt4XOIZa7Y
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,
