Are you on the growth path again today? Are you becoming reacquainted with the first law of entrepreneurial gravity — growth consumes cash?
One approach to generating more cash is to monitor your Cash Conversion Cycle (CCC) as a key performance indicator. 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). Too much time between spending and recouping dollars from your customers can cause a boatload of problems. Your goal is to reduce your cash cycle days.
As an example, in the 90s, Dell Computer was running out of cash. They had a 63-day cash cycle. To combat this they started requiring pre-payment before ordering parts or making your computer, and reduced their cash cycle from 63 days to minus 21 days.
Verne Harnish, Founder of Gazelles Inc. and a regular contributor to FORTUNE, has created the following list from his experience working with companies worldwide. Here are 10 ways to reduce your cash cycle.
Stop saying, “Well, this is just the way it is in our industry.” Implement 3-5 of these opportunities to 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.
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.
And how do you know if you’re generating enough cash to grow? How do you calculate a cash cycle? The best article on this subject, complete with formulas, is Neil Churchill’s Harvard Business Review article entitled “How Fast Can Your Company Afford to Grow?” You can go to www.hbr.org and download a copy for $6.
Verne has never experienced a business that can’t significantly improve their cash flow. And what it takes to reduce your cash cycle almost always leads to greater operational excellence and customer service.
Think about it. How can you improve your CCC and be more competitive? Contact me today to learn more.