A few years ago, I was the CFO for a company that repped testing labs to physician groups. I told you about the end of this company in the first issue. This is the part I left out.
The company was lean and successful, throwing off large amounts of cash. Then greed set in. One of the two owners discovered a new medical test that was going to “revolutionize flu season.” And with that statement, they started hiring people. Four salespeople with guaranteed base salaries and additional medical staff. All without so much as a test period or a test market. Zero proof of concept.
There was only one problem: none of the “Big 5” insurance providers acknowledged it as a legitimate test, let alone agreed to reimburse for it. All of those new employees relying on the owners to make sound decisions, and not one dollar of revenue coming in. The owners kept doubling down on this bad “build it and they will come” decision. The company bled cash until it bled out. I turned out the lights as I closed the door.
Money that arrives is not the same as demand.
Something happens in a business when cash lands. An investor writes a check, a loan clears, a season goes well, a big deposit hits. The room changes. The future stops feeling like a question and starts feeling like a thing that has already been settled.
But look at what actually arrived. Money from an investor is somebody else’s bet on demand. Money from a good season is last season’s work finally paying. A signed letter of intent is a plan. None of those things is a customer, and capacity is the one thing you can buy with them that starts costing you the day it arrives and only pays if the demand turns up.
That is the first half of the trap, and it is the half nobody calls a trap, because it looks like ambition.
Use everything you have, all the way up, before you buy more.
This is the rule I have preached to anyone who would sit still for it. Max out the capacity you already own before you increase it. Never the other way around.
You met the easy version of this last time. The truck sitting in the yard is not spare capacity, it is a bill with a paint job, and buying a third truck on top of two that are half-idle does not add capacity. It adds a second lawn ornament.
A person is not a truck, and the rule works differently for them. Putting an idle machine back to work costs nobody anything. Working a crew harder is not the same thing at all, and a crew that is already flat out is not a capacity problem you can solve by squeezing. That is usually a scheduling problem, or a pricing problem, or a leadership problem wearing a capacity costume. Run the utilization math on steel all day. Never on a person.
The rule survives the distinction: find out what you already have before you commit to more of it. That is true whether the thing you own is a truck or a Tuesday afternoon.
And here is what makes this genuinely unfair. There is no free version.
Build ahead and the work never comes, and you are paying for capacity that earns nothing.
Build ahead and the work does come, and you still get hurt first. Because of this:
Growth costs money before it makes money.
Every new job you take makes you poorer first.
You buy the materials. You pay the crew Friday. You put fuel in the truck and hours into the work. All of that money leaves your account in week one. The customer pays you in week five, or week seven, or whenever they get around to it.
So between the day you say yes and the day you get paid, that job is not making you money. It is using your money. And the bigger the job, the more of your money it uses.
Now take twice as many jobs.
The pros call this working capital, and when it goes wrong they call it overtrading, which sounds like something that happens on a stock exchange. For us normal people it is simpler than that: you can be too busy for your own bank account.
That is the trap closing. Not a bad year. A good one. The busier you get, the more of your own cash is out on the street at any moment, waiting to come home. Nothing has gone wrong. You have not been careless. You are winning, and the winning is what is draining the account.
What it looks like in your shop.
Take a job worth $10,000.
You know from a few issues back what that job leaves behind once it has paid for its own materials, fuel and subs: roughly $6,000. That is a good job. You would take that job every day of the week.
But look at when the money moves.
Week one, you spend $4,000 getting it done. Materials, fuel, the sub for the day. Real money out of a real account.
Week five, the customer pays. Now you are $6,000 up.
One job at a time, that works fine. You dip, you recover, you dip again.
Now you have the best year of your life and you are running four of those jobs at once. That is $16,000 out of your account before a single customer pays you anything. What those four jobs leave behind is $24,000, and it is genuinely there. It is just not there yet.
Meanwhile the truck payments still land on the first. Insurance does not wait for week five. Payroll certainly does not.
So here is the shape of it, and it is the cruelest thing in this whole letter: the month you did the most work is the month your bank balance looks the worst. Not because you got worse at the job. Because you got better at it.
And nobody sees it coming, because every single decision that got you there was a good one. You did not overspend. You did not get sloppy. You said yes to good work, four times.
The obligation nobody talks about.
There is a version of this that stops being a math problem.
When you commit past what your cash can carry, you have not just made a bet with your own money. You have made promises. To a customer expecting the job finished on a date. To a supplier who fronted you materials on the strength of your name. And if you hired for it, to somebody who left another job to come to you, and went home and told their family it was good news.
If the cash does not arrive in time, you do not get to break those promises evenly. You have to choose. And the choice almost always lands on whoever trusts you most, because they are the one who will forgive it.
That is the real cost of growing past your cash, and it never shows up on a statement. Payroll is not a line item. It is somebody’s rent. Grow at the speed your cash can actually carry, and you never have to decide which promise to break.
What to do Monday.
No spreadsheet. Nothing to look up. One question, asked out loud, before you commit to the next hire or the next truck:
Is this being paid for by a quarter that has already closed, or by one I am hoping for?
That is the whole test. If the money that funds the decision has already landed and been earned, you are investing. If it is coming from a quarter you have not lived yet, you are betting, and you should at least know which one you are doing.
Companies in a growth phase need to live one quarter at a time. This quarter’s wins unlock next quarter’s investment. Not the reverse, no matter how certain next quarter looks from here.
And if you want to know whether it has already happened to you, there is a second thirty-second version. Pull up your bank balance on the last day of your busiest month this year, and then the last day of the month before it. If the busy month left you with less money than the quiet one, you have already watched this happen. It is not a warning anymore. It ran.
None of that is a reason to stop growing. It is how you find out how fast you can afford to.
And if you would rather see it coming than find it afterwards, the Cash-Flow Reality Check rolls your next thirteen weeks forward on numbers you already have, so the thin week shows up on a screen instead of in a phone call from your bank. It is free and it takes a few minutes.
Here is the part I want you to keep.
Everything above is knowable in advance. Not precisely, not to the dollar, but well enough. The owner who understands this is not the cautious one who never grows. They are the one who can say yes to the big job with their eyes open, because they already know what carrying it will cost and they have decided they can carry it. An informed decision.
That is the whole difference. Not growing slower. Growing on purpose, at the speed your cash can actually carry, one quarter at a time. Let this quarter’s wins pay for next quarter’s move, and growth stops being something that happens to you.
You are allowed to want the best year you ever had. Just make sure it is the one you can afford to survive.
— MJ
P.S. Hit reply and tell me the one operational number you watch in your business. When I ran a trash company, everything came down to per route hour. I read every reply.
Next time: the customer who saved your business, and the reason they are the most dangerous thing in it.
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Pass it on. If you know someone running a shop who’d rather be told the truth than sold a service, send them this one.
The tools are free. Six of them, no sign-up, and they run on your own numbers: realitycheckcfo.com
Earlier: The Money Parked in the Yard
Or read the whole run in the archive →