[MUSIC] Joining us now is Verne Harnish. Verne is founder of EO, founder of Gazelles International, a columnist for Fortune Magazine, and author of the wonderful book, Scaling Up. Verne, it's fantastic to have you with us this morning. Thank you so much. >> John, good to see you. >> So Verne, we've been talking about venture capital, and my belief that taking venture capital at least in the early stages of a new venture is a pretty bad idea. But you've built multiple businesses in your own career. You've done it both ways, any lessons? >> Yeah, I built a couple of nonprofits. And then when I launched Gazelles, I went out and did like everyone else. I went to friends and family, we raised pretty sizable chunk of change. And you know what? I dutifully lost the money- >> [LAUGH] >> As we went over from a half million, to million, to 2 million, to 4 million. because that's what you do, right? Growth sucks cash. And what was sad is that if I had not had the money I don't think I would have spent it. And then when we hit the wall right after 9/11 in 2001, not only did I owe that money back to those guys, but I was broke. And I had to figure out a new way to do it. >> Interesting, so what was that new way? How did you make it work? >> Well, John, I mean you wrote the book on it. I went to our best customers. And to 17 of them I said look, would you prepay? And I cut a deal with them. Would you prepay what you normally spend with us for a year? And we're a consulting, coaching and technology company and they said yes. And I basically put an entire year's worth of payroll in the bank. And I gotta tell you, you sleep a lot easier and you age a lot slower when you've got that. And since 2002 we have stuck to that rule. We still have a program today where are best customers prepay a year in advance in exchange for a lot of other goodies. And we've got our entire year's worth of operating expense, like Bill Gates always had as a rule at Microsoft. And that's really helped us scale up without using any external cash since. >> Fantastic, so you've spent something like three decades now working with growth firms. And you've seen how they grow, and how they stay on top of their cash as they grow. What are some of the lessons you've learned there? >> Yeah, well John, I really wish they would stay on top of cash. I mean, if there's something I learned over the 33 years is we're lucky if we can get them to look at a financial statement. >> [LAUGH] >> And when they do once a month, they go to the P&L. They skip all the detail, go right to the bottom line. Is it black or red? And that's really about the extent of their financial literacy. And so I gotta tell you, it's been three decades of trying to drag these entrepreneurs and other leaders of growth companies over to at least paying a little bit of attention to the cash side of the business. So when we wrote Scaling Up, different than the first book, Mastering the Rockefeller Habits, we put an entire section on cash. Where we said look, let's get focused on three strategies that you can use to make sure that you've got the cash that you need to fuel your growth. >> So tell us a couple of stories about companies who've done that well. >> Yeah [COUGH] well, one of the first ones is just really shorten your sales cycle. And by the way, the guy that taught this to me was Tom Meredith. Michael Dell, who had built Dell early on to a billion got in cash trouble himself. And the board basically fired everyone, Michael was 26 at the time, except Michael. And they brought in kind of as the first adult supervisor, a guy 15 years his senior, Tom Meredith. And Tom was really his first legitimate CFO. And I remember Tom describing me as he describes it in the book, sitting Michael down and drawing this famous triangle and said look. First, you know you're out of cash because of growth. Growth sucks cash, but I'm not here to tell you to slow down. I mean, when there's the market that you've gotta grab, you gotta go. But he said let's grow where we're profitable, which was the second leg. And they went and eliminated a bunch of the product lines and distribution channels that they had been in that had been highly unprofitable. And they said number three, let's have liquidity. Because again, you're going to age a lot slower and grow this business if you've got liquidity. And ultimately that's what Tom focused on. And the first thing he calculated for Michael is what you guys call the cash conversion cycle. You and Neil wrote the famous article at Harvard Business Review that we've had almost every entrepreneur read since. And they had a 63 day cash cycle. I mean, Michael had to spend a dollar on sales and marketing and inventory and payroll and rent and utilities. And it took 63 days for that dollar to make it all the way through his business model and back in his pocket. And so Tom's focus for Michael was that I'm going to initiate something every quarter that's going to help us improve that cash cycle. And a decade later, 40 basic quarter initiatives, they had dropped that from 63 days to minus 21 days. And they went ahead it further drove it down about minus 34 days. And that really allowed Michael to fuel his own growth as they then drew the company to 60 billion. >> Yeah, and it's interesting that Michael got in that trouble. Because at the very beginning, of course, he'd been wise enough to ask for the cash for the PC before he sold it, right, so- >> Yeah, but what Tom reminded us of is Intel, one of his major suppliers, they want it paid in 30 days. And as they started building up inventory and payroll and all the rest that's required to get to a billion, that's when he got in trouble. >> Yeah. >> And it happens. More I think to the size companies that may be watching this, I think it's something very simple that Sam Goodner did at Catapult. He had a technology solutions company, Microsoft Solution Provider. And he had a simple problem. He's growing rapidly and he's paying his people twice a month. But he's only collecting from customers once a month. And it's that kind of simple thing that can get you in trouble. And so what he did to double his cash conversion cycle was they simply went to his customers and said hey, can I bill you twice as much. And a majority of those customers said yes. And that actually fixed his cash conversion cycle. >> And that's a small company like many of the companies all around the world, run by an entrepreneur who's just working hard to build a nice little business. And so you don't need to be a Michael Dell to do this, do you, you can- >> Exactly. >> You can be anybody. >> Now, no I'll finish the story. Sam was able to scale this thing up and recently sold it to ChinaSoft. So now it is one of the largest Microsoft Solution Providers, if not the largest in the world. But he was able to scale up on his own cash. And as a result you get a much higher valuation when that happens. >> Okay, so this phenomena happens in service businesses. It happens in product businesses. Do you see a playing out differently depending on whether you're in services or selling goods? >> Yeah, I get a kick out of that. because as you know, a lot of product companies end up adding services as a way to enhance their margins. And service companies ultimately figure out a way to productize. And so I really don't see any different. Whether you're a manufacturer like Dell, or you're IT services like Sam had at Catapult. And one of the other ways that companies can just collect faster is actually get their bills out the door. Let me move to a staffing company, PPR, Dwight Cooper's firm. They had a challenge where, particularly if you're B2B, you've got a lot of your cash held up in accounts receivables. And for them, providing nurse staffing, of the thousands of hospitals they were servicing, about 150 represent a bulk of their account receivables. And so Dwight did something very simple. He had one of his staff, Ann Mims, focus on the accounts payable clerks at those hospitals. Building a relationship, nurturing a relationship with them like you would with your customers. because a lot of our cash is held hostage by these payable clerks. Her other job was to make sure the invoice got out today, not tomorrow, and last, that it was accurate. They found out once they went out and talked to these accounts payable clerks that their bill, their invoice wasn't structured any way like what made it easy for the hospital to pay the bill. Then they did one other clever thing. They turned it from the standard white to a light blue so the payable clerk could find it. >> [LAUGH] >> And then Ann's job- >> It's the blue one. >> Exactly. Get the invoice out, call ten days later just to confirm that they'd received it. They'd say hey Ann, we love the way your invoice is structured. I see it in the pile, it's blue, I'm going to pull it out. And they took, John, 15 days out of their cash conversion cycle, just again, by putting somebody on it and focusing on getting invoices out and getting those things collected much faster. >> So it’s not rocket science, Verne. >> No, in fact I, let me tell you what I think is one of my favorite ideas. It may be considered illegal. It's not really, but the guys don't want us to tell what the name of the company. [MUSIC]
