How Getting Good Cash Flow Will Help Your Business Grow
“Income is vanity, profit is reason, money is king. ”
Have you ever heard this phrase? You are probably familiar with this, especially the last point about cash. If you want to grow your business, you need the money. Because growth eats cash. This can be a big challenge for CEOs. Assets and liabilities are what you owe, equity is your book value, and you can’t pay the bills with profits. You need cash, cold and accessible.
The pandemic has made this evident. Firms with cash reserves weathered the storm much better than those without. More than that, they took advantage of new opportunities and pivoted quickly to maximize their return. In his book “Great by Choice,” Jim Collins takes a look at small businesses and their return to luck. This is largely due to cash reserves. At all times, you should have at least three times your monthly cash costs, available and ready to go.
If you’re nodding, it’s time to take a step back and take a hard look at this. How exactly does money flow through your business system? And are you missing any tips that could fund your future growth?
Review of the Quote-to-Cash Process
When we define the value chains and key functions of our clients’ businesses, we look at the quote-to-cash process. We look at the granular details, noting each function in red, amber, or green and calculating the inputs and outputs of each.
It helps our clients see how fast money is flowing through their business. Let’s say you are a retail business and want to open a new store. The clothes have to be designed, made, stocked and displayed in stores. Until the moment you open the doors, it has all been at your expense. It might have taken you six months to get here and all of your working capital is tied up in your inventory.
Maybe you have enough money to start your business and open a few more stores. But how do you open a third, tenth or 100th store? Because each time, you have the same working capital which immobilizes everything. To access 250 stores, you’re going to have to borrow a lot of money.
Or you ? There may be a way to reduce your financing needs to allow you to scale. Are there other strategies for financing the business so that you don’t have to resort to selling equity or going into debt?
A look at client-financed growth
Here is the thing. CEOs default to borrow money or sell stocks when cash is tight. But they don’t consider finding ways to raise more money from their customers. Our advice? Read ‘Customer Funded Business’ by John Mullins – this is our book of the week recommendation to our clients. And for good reason. This easy-to-digest book takes a deep dive into the cash-generating practices of Bill Gates and Michael Dell, among others.
Dell Computers is a perfect example. Instead of building a bunch of computers and keeping them in stock, they built them to order. So when they sold you a computer, they charged your credit card and then started the construction. They weren’t spending money until they got your money and once they got it they built it and shipped it to you. They also renegotiated the supplier’s terms, dropping them from 63 days to minus 21 – soon they kept the float.
Mullin’s book also mentions Banana Republic. They started a catalog and charged it $ 1. This meant that they were making money on the catalog before going into the main part of their business which was selling clothes. Thanks to customer-funded growth strategies, the company reached $ 2 million before selling it to Gap.
Charge in advance
Look at your business model. Is there anything you can bill in advance? Consulting firms do this with many of their services. It’s interesting. When I think back to my time as Managing Director of Rackspace and Peer 1, our focus was on increasing recurring monthly revenue. There was no additional charge for professional services.
But then AWS and Azure came along and the game changed. Yes, we were making a margin on a lot of that consumer income, but not as much as when we had our own data centers. To keep the economic fundamentals the same, we needed to start charging more – charging up front for the advice instead of giving it away with the recurring monthly fee.
The economy of the whole industry has changed. If we look at our customers Pax8 and Cognizant, they now have a very different business model. This has been a struggle for many hosting providers as they didn’t know how to charge for the services. It wasn’t in their DNA.
Look at everything you do through the lens of extras. Don’t give out fees for design, audits, presales, or anything that involves your cognitive abilities. People will pay for these things if they like them. Likewise, your intellectual property – charge for it. And don’t run. ‘The Win Without Pitching Manifesto’ by Blair Enns is a great read to persuade you why. If people ask us to pitch, we say no. It’s because we know it puts us in a race to the bottom.
Negotiation of supplier and supplier terms
Negotiating more favorable terms with suppliers can make a huge difference to cash flow. At Rackspace and Peer 1, our hardware was on consignment from Dell. It was in our data centers, but we didn’t have one – it was Dell. We only started paying for it when we deployed it. It had a huge impact. In 2001, we were purchasing five to ten servers at a time from Evesham Micro. And we paid cash in advance. As we grew our capital requirements decreased because we had grown large and negotiated a much better arrangement.
Likewise the conditions of the supplier. I was with a client the other day who decided to ask some of their bigger suppliers for 45 day terms. For the smaller ones, they stayed for 30 days because they remembered too well what it was like to be a small business.
Shorten the sales cycle
Businessman hand holding a target with darts hitting the center on white background. Personal coaching success concept
Another great cash lever is your sales cycle. How to shorten it? I’ve written about the Sales Velocity Formula before – it’s a nifty tool that helps focus the mind. Take a look at the number of opportunities generated by your teams, your close rate, average order value, and time to completion. Determine what’s holding things back. In his book “The Machine”, Justin Roff-Marsh often refers to technical sales as a constraint. So watch how you can release this.
Make sure you charge for presales and not give them away. One of our customers has gone from not billing presales to a whole new model. They offer a free half-day public workshop. The result is a paid private workshop that leads to managed services. It is a very effective sales funnel that allows potential customers to switch from free services to paid and fully managed services. The age-old problem with service companies is that customers have no idea how good your offering is. They have to try it. And you have to offer them that opportunity through your sales and marketing process.
Make it theatrical. Here’s something seemingly insignificant that made a huge difference in our conversion rate at Rackspace, Peer 1, and IT Lab. Homemade cake! Yes really! I had experienced a welcome tray at? WhatIf! This had impressed me so we started serving cakes made by the mother of a member of our team to potential customers. It happened every time they came to see us for a meeting. He immediately said, “We’ve made an effort” and gave potential customers an idea of the service they could expect.
To be honest, it was a great cake. Huge tasting, chocolatey and deliciously homemade. A purchased cake would not have cut it. Our quote conversion rate went from 40% when we visited customers to 80% when they came to see us and received Sam’s mum’s cake!
Review of production, inventory, billing and payment cycles
Once you have sorted out the cash flow in the sales cycle, take a close look at production and inventory. Where is the money tied up here? What’s your turn? How can you have this on the supplier’s terms so that it doesn’t cost you anything? And how can you speed it up?
Two of our clients Etch and Cognizant MGB have an innovative approach. Once they win a deal, they bring in contractors to deploy it, reducing their human inventory cost. If this becomes a regular activity, they move towards hiring these full time entrepreneurs. Cognizant MBG has generated a whole stream of revenue around data analytics, using contractors first and then turning them into full-time employees.
Finally, take a look at your billing and payment cycles. There are so many automated options now to make this quick and easy. Read ‘Scaling Up’ by Verne Harnish for examples of companies doing this differently.
Ultimately, get your leadership team together regularly to focus on cash flow. There are some great templates and tools in the scaling that are a big help. Brainstorm and choose which ones have legs. And every six to twelve months, come back and see what worked.