Shoe Dog Review | Lessons in Business Cash Flow Management

The reason I recommend Shoe Dog is because it is an expert story in the woes of cash flow with fast growing product-based businesses. This is a valuable lesson to anyone who is in business and wants to grow fast, but especially to online sellers who experience long cash cycles.

Shoe Dog doesn't actually describe the cash cycle like you'd learn it in business school. Shoe Dog brings up the underlying challenges of cash flow over and over, whether it's trying to buy inventory, trying to pay down his lines of credit, trying to make payroll, or pay his vendors. It's the constant challenge of a fast-growing product-based business.

1:04 Phil Knight's cash cycle

To highlight the challenges of a cash cycle, let me hit on the key points that Phil experienced.

First, he would order shoes from his manufacturing partner in Japan and wire money. Second, the shoes were manufactured and put on a boat for delivery. Third, the boat made it to the US, where Phil and Blue Ribbon Sports had to distribute it to different retailers.

While the book doesn't go into exact timelines, I imagine it had to take weeks to months for that full cycle, from the purchase of inventory to actually receiving cash back for the sale of those shoes. Meantime, the headaches deal with all the expenses that a business has, including payroll, rent, et cetera.

This isn't a big problem if you have lots of cash on hand. But in the case of Blue Ribbon Sports, aka Nike, where they were doubling their sales every year, all of their cash was locked up in inventory and that cash cycle.

1:51 Why it still applies today

A lot has changed since the founding of Nike, but so much manufacturing is still done offshore. And so you still have to wait for the product to be manufactured, the product to ship on a boat, the product to make its way through distribution, fulfillment and sales. And even with faster logistics, your ability to replenish cash is only as fast as you can sell that product.

2:12 Improving cash flow with pre-selling

So what are some things that you can do to improve your cash flow?

First is pre-sell product. In Shoe Dog, Phil used discounting or pre-orders to retailers to bring in cash early. This doesn't always work, but if you have a high demand product, getting customers or partners to pay upfront can work. A modern example of this is crowdfunding. We've seen a number of our customers use crowdfunding to put cash in their bank to fund the development and manufacturing of their product.

2:37 Financing options

The second area to improve cash flow is financing. Shoe Dog has many high stress stories between Phil and his lenders. Options weren't great then, but they're better now.

Financing can come in a lot of different flavors. It can start with business credit cards to stretch out your cash cycle. It can be lines of credit used to finance inventory purchases. It can be factoring of invoices, where you sell your invoices for discounted value to another company. Factoring is often used with long collection cycles, like we see with consumer products companies who are wholesaling to retailers that have long payment cycles, like 90 days or greater. Another option is long-term business loans to build up working capital and the money you need for your cash cycle. And finally, you can do venture financing, where you get money from investors in exchange for equity or ownership in your company.

3:22 What to do before you need it

I would recommend every online seller read Shoe Dog, especially if they want to grow quickly. The stresses that Phil Knight experienced will be present if you don't plan ahead.

One, establish business credit early. This can start with business credit cards and expand from there.

Two, build up your business banking relationships and start looking to get lines of credit early. Oftentimes banks won't give you the credit you need until it's too late. Financing is best done when you don't need the money.

And of course, we would say having a good understanding on your finances, cash cycle and accounting are important.

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