As we continue to deal with COVID-19 and its economic impacts, many businesses are facing cash shortages – yes even with PPP and other government programs. There are several old sayings: “Cash is King” and “Growth Sucks Cash.” Today we can add another: cash is the fuel required to sustain your business and keep you in the game.
Cash Conversion Cycle
One approach to generating more cash is to focus on your Cash Conversion Cycle (CCC). This is a measure of how long (in days) it takes from the time a dollar goes out until it comes back to your business (your CPA can calculate this for you).
Think about the time from identifying a prospect to finalizing the sale and getting money in your bank account. If you reduce that cycle time your cash comes in sooner. How can you reduce the sales cycle, the order cycle, the production cycle, the delivery cycle, the invoicing cycle? Shorter cash conversion cycles result in faster cash flow. Your goal is to reduce your cash cycle times.
Cash Flow Opportunities
Can you implement 3-5 of these opportunities to shorten your cycle and increase your cash flow?
- Have your available cash reported DAILY with a short explanation why it changed in the last 24 hours — and chart against A/R and A/P weekly. You’ll learn so much more about your business when you see how the cash is flowing on a daily basis.
- If you want to be paid sooner, ask. Small firms are finding that large firms (and governments!!) will pay considerably faster or even prepay if you simply ask, ask, ask, ask, and ask some more.
- Give value back for customers that pay in advance or on time — more below.
- Get your bills out quicker — hire one more person in accounting to do nothing but make sure invoices are timely and followed-up.
- Understand why your clients are paying later — many times there are recurring mistakes on the invoice or the invoice is not structured to make it easy for the customer to reconcile.
- Understand your customers’ payment cycles and time your billings to coincide.
- Pay many of your own expenses with a credit card so you can play the float and get your own customers to pay by credit card.
- Help your customers improve their cash so they can pay you — offer them leasing options, for instance.
- Shorten product and service delivery cycle times. All of you have some kind of “work-in-progress.” The quicker you complete projects, the quicker you get paid.
- Of course, improving margins and profit improves cash.
Stop saying, “Well, this is just the way it is in our industry.” That thinking is no longer an option. Keep creating value for your customer and there will be NO push back.
Gather your leadership team together and brainstorm 3-5 ways you can immediately reduce your cash cycle and significantly increase your operating cash position within the next 12 months.
Business Model – Another Consideration
Is your current business model a cash spicket or a cash suck? Can your business produce more cash by changing or modifying your business model? The COVID-19 virus is changing how we shop, travel and work for at least a year or more. All our assumptions about customers, sales cycle and most importantly, revenue, may no longer be true. Is it conceivable that you can continue with the same business model that you have today? See my article: Is It Time to Rethink Your Business Model?
Think about it. What are the ways you can improve your CCC and stay in the game? Contact me to discuss your cash flow and business model.
May you, your company and families stay safe and healthy.
All the best
© 2020 David Paul Carter. All rights reserved.
Cash Flow Opportunities © 2020 Verne Harnish, Gazelles Inc.