Across February I spoke about cash.  Not how to make more of it.  But as a first step, how to see it more clearly.

When you can see your cash position — I mean really see it — interesting things start to happen.  

• The noise reduces
• The constant nagging stress and anxiety dissipates
• You move from reacting to events to planning with an understanding of your runway.

However, that is not where the story ends!  This is actually the point at which even more interesting and important questions are presented.  Once cash becomes visible, it allows attention on other patterns at play in your business:

• Why are margins feeling tighter than they should?
• Why is my team working hard, at almost constant full capacity, but overall progress feels slower than expected?
• Why are revenues rising, yet profits are refusing to follow?

It’s not solely a sales problem.  Or a pricing problem. Or a motivation problem. In many businesses the real issue is something much quieter.

It is in fact: Operational Debt.

The Debt That Sits Off Your Balance Sheet

Financial debt is fairly straightforward:

• Borrow money today; then
• Repay it later, with added interest.

Operational debt works in a similar way.  However, instead of borrowing money, you borrow time, simplicity and clarity.  The interest here is in making repeated small compromises in how you run your business.

This could be:

• Continuing to use a spreadsheet instead of investing in a proper software system
• A process that is allowed to live inside someone’s head undocumented
• Quick off-the-cuff pricing decisions made simply to secure a deal
• Manual work that needs done today and you’ve promised to automate next time
• A client project that is allowed to stretch beyond the original scope to keep them happy.

At the time these decisions feel necessary.  They are made to accommodate the need to get things done and to bring in revenue.  That doesn’t feel particularly dangerous in the present moment.  However, each decision is ultimately a shortcut that leaves behind a scar:

• A little bit of friction
• A small inefficiency
• An extra unnecessary step
• A requirement for one added conversation that shouldn’t need to happen.

And, over time, these will accumulate quietly until one day you will suddenly realise that the business feels really heavy to run.

The Silent Tax

Imagine Operational Debt as a silent tax inside your company.

You won’t see it reported in your month end report pack, invoiced in an email, or taken as a direct debit from your bank.  However, every day you are making this silent tax payment through:

• Every piece of duplicated work
• The added time in unclear work handover between key personnel
• Pricing decisions made without clear data on desired margins
• Project scope that slowly expands
• The need for you to be the final decision point for everything

Sound familiar? I bet it does.  Individually these feel small; collectively they are absorbing enormous amounts of energy and margin.  And, worst of all, because they develop gradually, they are most often going unnoticed.

You will have heard the metaphor about the difference between a frog placed into cold and boiling water.  When the frog feels the boiling water, it recognises danger and jumps straight out to safety.  If placed in cold water which is then heated slowly, the frog doesn’t realise the danger until it’s too late.

In most founder-led businesses, the frog is you.

The pan is the business.

And operational debt is the heat slowly building underneath.  

This is what is making the business simply starting to feel… how can I say it simply…. harder:

• Harder to scale
• Harder to delegate
• Harder to maintain healthy margins
• Harder to take a break from.

Revenue Can Hide the Problem

Revenue growth can sometimes hide the operational debt in a business for years.  This is because strong sales make inefficiencies much easier to absorb.

As more work flows through the system, you grow the team and push harder, including yourself.

However, eventually the cracks start to show, as projects take longer, margins are diluted and cash becomes less predictable and more volatile.

At this stage you may feel like you are pushing water up a hill.  Not through a failing business overall, but from failing systems that have gained too much weight as the business has grown.

The Good News

Operational debt is rarely about bad people or poor effort.  You will know if your team is right and have the attitude to work incredibly hard to drive success.

The issue is almost always structural.  And this is good news.  Structural problems can be fixed. However, they can only be fixed once they are visible.

That is why I spoke throughout February about making your cash visible.  During March the theme will be about making your operating system in the business visible.

Where friction has built up.

Where margins are leaking.

And where complexity is quietly draining your energy.

A Simple Starting Point

You just need to ask the right questions.

• Where does work slow down in the business, and why?
• Where do decisions constantly return to me, and why?
• Where do projects overrun their original scope, and why?
• Where are manual processes still doing the job of systems, and why?

Starting to assess these questions and understanding the answers will start directing you to where operational debt has built up.

If you’re curious about where this might exist inside your own business, we have a simple CFO Toolkit that helps business owners run through these questions systematically.  It will give a clearer view of how the business is actually operating beneath the surface.

Once you can see where friction exists, you can begin removing it.  And that is when the powerful impact begins because the systems underneath the business are finally working properly.

“How did you go bankrupt? Two ways. Gradually, then suddenly.” Ernest Hemingway