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The Three Legs of Money Management

August 4, 2009

Today I met with a CEO who shared a wonderful analogy of managing money in a business.    He said; “It’s very simple, a business is a three-legged stool and you need to have your money in three places; Inventory, Receivables and Cash. If you have too much in any one place, the stool is off-balance and could eventually tip over.” 
 
This reminds me of the experience a friend is currently having trying to save a 180 store jewelry chain. He has run inventory so low that sales are now suffering. The bank is happy because they’re getting paid but he wants to save the business and not shut it down. And, in theory, so does the bank.

But how do you explain merchandising to a banker?  Even worse, how do you explain it to a banker in the “special assets” department of your friendly neighborhood bank?   (think of “Special” as in special-education, you were not sent there as a reward).  Many seasoned bank officers will understand the need for balance between the three legs of your business stool but some young spreadsheet jockey won’t. And if you’re backed by private equity money, forget it. The whiz-kids who worked on valuations two years ago are now “managing” the portfolio from Excel, not the shop floor. 

So, how do you balance the three legs of your stool in this economy?  You have to know what you can cut and where. What brings value and where the core of your business really is. You have to know how far each stick can bend without breaking.  And you have to know how to satisfy all the competing interests enough and get them to support your plan.

My turnaround friend will end up achieving this balance because he’s good at his work. My CEO friend has already achieved that balance so will spend this winter in Florida again.

Learn more about running a balanced business at  www.DorsetPartners.com