39 ms·

A large part of your blog post seems to be premised on the difference between incoming cash and outgoing cash. That only works as long as the people you're payi

by amirmc 12y ago

A large part of your blog post seems to be premised on the difference between incoming cash and outgoing cash. That only works as long as the people you're paying will accept net-30 (or have it imposed on them) -- Amazon was a great example of this but their suppliers also got wise to it. In the current scenario, all those instacarts, eat24s, etc are also looking to get paid first, so this advantage should evaporate (leaving only those which are systemic -- ie banks, processors, etc).

patio11 12y ago
If you receive money on a credit card and pay expenses on a credit card, you're virtually guaranteed to have positive cash flow. It's one of those services you're buying when you pay CC processing fees. Example: Suppose I am in a "Buy things for $50, sell them for $60" like Magic is. Day 0 is the transaction day. I buy the good/service for $50 on my Amex and capture a $60 transaction from the end-user using Stripe. Stripe sends me 97% of $60 on day 2. It arrives in my bank account on day 5. My next Amex statement is, probabilistically, issued on day 15, and includes the $50 I spent to service my customer. On day 22, I instruct my bank to transfer Amex $50. (We'll ignore the relevant detail that I'm generating cash rewards from Amex up the wazoo once I hit scale.) In addition to $8.20 or so of revenue I've also had ~17 days of use of someone else's $58.20.
- ojilles 12y ago
  Extremes in this area: insurance companies, pension funds. I think it's called "float".
- shalmanese 12y ago
  OK, so in the 17 days I have the $58.20, let's say I can make a completely optimistic 5% APR return risk free on my float. I've now made a whopping 13.5c extra on top of my $8.20 I made providing the service. Excuse me if I'm not getting excited over squeezing out an extra 1.6% profit.
  - mikeyouse 12y ago
    It's not the profit that you're trying to capture, it's the flexibility gained from having working capital. In that 17 day window, you can complete another sale without any additional outside money or pay for an unexpected expense. Having working capital is huge for quick turnaround businesses; http://blog.mbaco.com/importance-of-a-good-working-capital-management/ http://blog.mbaco.com/importance-of-a-good-working-capital-m...
  - patio11 12y ago
    That's not the main thing that float does for you. Massive positive cash flow as a result of operational dynamics means that you if you happen to have explosive growth you can fund it out of your cash flow rather than having to go begging on Sand Hill to pay for your rocket fuel, like many tech companies. Might as well give two examples of how it looks like with different business models: + SaaS is often cash-flow negative if you're doing month-to-month billing, since cost of customer acquisition (marketing spend + sales commission) is routinely 4~8 months of billings. If you increase MRR by $100k in a month you're doing great, unless you don't have $500k in the bank account, in which case you just bankrupted yourself. + E-commerce: If you're in a model where you actually hold inventory, it is very possible to need to pre-purchase a large amount of inventory in advance, occasionally on non-favorable credit terms (like e.g. cash before delivery), prior to being able to sell it. Many of the great e-commerce businesses are built on various hacks which flip this cash flow cycle around. Amazon, for example, was famous for (ab-)using traditionally prevailing payment terms in book publishing which are hilariously in the favor of retailers ("We'll just give you free inventory and only ask you for money if you sell it." "OK. Tell you what, how about we sell it, only then even take delivery, and then pay you." "My, you tech people sure don't understand how this game works. OK, sounds great.") -- that's one of the reasons they picked books as their first base of operations.

by amirmc 12y ago

patio11 12y ago

If you receive money on a credit card and pay expenses on a credit card, you're virtually guaranteed to have positive cash flow. It's one of those services you're buying when you pay CC processing fees. Example: Suppose I am in a "Buy things for $50, sell them for $60" like Magic is. Day 0 is the transaction day. I buy the good/service for $50 on my Amex and capture a $60 transaction from the end-user using Stripe. Stripe sends me 97% of $60 on day 2. It arrives in my bank account on day 5. My next Amex statement is, probabilistically, issued on day 15, and includes the $50 I spent to service my customer. On day 22, I instruct my bank to transfer Amex $50. (We'll ignore the relevant detail that I'm generating cash rewards from Amex up the wazoo once I hit scale.) In addition to $8.20 or so of revenue I've also had ~17 days of use of someone else's $58.20.

ojilles 12y ago
Extremes in this area: insurance companies, pension funds. I think it's called "float".
shalmanese 12y ago
OK, so in the 17 days I have the $58.20, let's say I can make a completely optimistic 5% APR return risk free on my float. I've now made a whopping 13.5c extra on top of my $8.20 I made providing the service. Excuse me if I'm not getting excited over squeezing out an extra 1.6% profit.
- mikeyouse 12y ago
  It's not the profit that you're trying to capture, it's the flexibility gained from having working capital. In that 17 day window, you can complete another sale without any additional outside money or pay for an unexpected expense. Having working capital is huge for quick turnaround businesses; http://blog.mbaco.com/importance-of-a-good-working-capital-management/ http://blog.mbaco.com/importance-of-a-good-working-capital-m...
- patio11 12y ago
  That's not the main thing that float does for you. Massive positive cash flow as a result of operational dynamics means that you if you happen to have explosive growth you can fund it out of your cash flow rather than having to go begging on Sand Hill to pay for your rocket fuel, like many tech companies. Might as well give two examples of how it looks like with different business models: + SaaS is often cash-flow negative if you're doing month-to-month billing, since cost of customer acquisition (marketing spend + sales commission) is routinely 4~8 months of billings. If you increase MRR by $100k in a month you're doing great, unless you don't have $500k in the bank account, in which case you just bankrupted yourself. + E-commerce: If you're in a model where you actually hold inventory, it is very possible to need to pre-purchase a large amount of inventory in advance, occasionally on non-favorable credit terms (like e.g. cash before delivery), prior to being able to sell it. Many of the great e-commerce businesses are built on various hacks which flip this cash flow cycle around. Amazon, for example, was famous for (ab-)using traditionally prevailing payment terms in book publishing which are hilariously in the favor of retailers ("We'll just give you free inventory and only ask you for money if you sell it." "OK. Tell you what, how about we sell it, only then even take delivery, and then pay you." "My, you tech people sure don't understand how this game works. OK, sounds great.") -- that's one of the reasons they picked books as their first base of operations.