My Zawya Story: Positive Cash Flow Challenges

This post is part of the My Zawya Story series.

Most entrepreneurs would be surprised that positive operating cash flow can present challenges. After months, even years, of striving for the magical cash flow break even point what problems can there be once this goal is reached? The challenge is sustainable growth as painful initial sacrifices on expenses are reversed and short term investment horizons on the income front need to be extended.

 A start up rarely has the luxury of surplus funds that allow it to build its long term target operating model and give it enough cash runway to build a sustainable high quality profit base. Investors demand that companies transition from using equity to fund expenses to using revenue to fund expenses. The standard method to do this is two pronged. Expenses are managed in the short term by temporarily asking founders and senior executives to accept lower pay, negotiating special rates with suppliers, delaying capital expenditure and requesting investor support. On the revenue front business development focusses on quick conversion clients at the expense of a wider more stable client base and client acquisition based pricing strategies as opposed to profit maximising strategies. Zawya was no different.

As the magical operating cash flow break even point approached in 2004 the pressure began to build from management, Saffar and suppliers to regularise all economic relationships and make them market based. In hindsight it was clear that a lack of early expectation management by Zawya had led each stakeholder to believe that they would be first in line to receive excess cash flow. To add insult to injury, several suppliers (information and data providers) felt that since Zawya was becoming financially stronger then this warranted an increase in pricing on their part.

On the revenue side the debate on the right product mix continued with advertising revenue on the one hand, which was easier to acquire but could be highly volatile, and subscription revenue on the other, which required much more capital expenditure but was far more stable income and where the growth could be sustained.

The easier challenge to resolve was the product mix as we continued by deploying a dynamic strategy that was re-examined on a regular basis based on validated performance indicators. The only regret that I have is that we chose to continue on the same P/L trajectory rather than allowing the cash flows to flat line and investing surplus cash in longer lead time but much more valuable products and services. The lesson here is that it is critical that a conscious change in mind set occurs to match the transition in the business from a ‘survival’ mentality to one of ‘growth.’

The transitions on the expense side were much more difficult. In terms of Zawya’s management and Saffar I took the leading in resolving the situation and it took my putting my reputation and personal credibility on the line to make it work. Ihsan took the lead in managing the suppliers and he did an effective job there. The lesson for me was that I could not foresee all the bumps in the road and that treating people well and building up a strong working relationship with them was a way to invest and insure against future problems. This was an extremely powerful lesson for me.

The takeaway is that the currency of business is not only financial but that reputation and character play an equally valuable role, one that the successful entrepreneur must invest in early and often. Awareness of major transition points in the life of a company and the implications that arise is also important as growing businesses move from crisis management to identifying and investing in opportunities.

Main series page: My Zawya Story.
Previous article in series: Negative Cash Flow Lessons.
Next article in series: Strategic Growth Decisions.