Need more cash to fuel your business? Read this.
Reliable sources of cash are the fuel for your business growth. Cash is the oxygen. You might be showing profit on paper, but unless cash is in your hands you can’t use it to buy raw goods, pay for your facility, invest in advertising, or build your production capacity. In a thriving business, sales produce profits, and profits provide cash. The cash from profitable sales is then reinvested in generating more profitable sales. It’s a beneficial cycle.
Why does it sometimes seem so difficult to manage your cash position? Because its free flow is stymied by one or more of several processes in your business.
- Sales process – When your sales cycle is slow, you have the potential for cash sitting all over the place. In the meantime, you have to figure out how to fund your current operations. The slower your sales cycle is, the more cash you need to access to get through to the next sale. And if there are problems with your process, the length of the process means it takes a long time to discover and fix problems. Are there products you could sell that would move more quickly? (Think of the impulse purchase items in the retail checkout line.) Are there prospective clients or groups whose buying process is less cumbersome? Are your sales persons effective in initiating enough new conversations with the right people and then shepherding them through to an order?
- Production process – There are so many causes for slowdown here. Shortage or high cost of raw goods, too many item numbers, poorly trained staff yielding quality problems, even staff absenteeism. You want your sales to increase, but that also means that your production capacity needs to increase. If customer orders aren’t filled in a timely manner, customers are going to go elsewhere. On the other hand, if you produce too quickly and accumulate inventory, you run two risks:
- first, that you tie up cash in producing the inventory long before you sell it,
- second, that your inventory could go stale or obsolete and you have to sell it at cost – or worse.
- Delivery process – How long does your product or service take to get to the customer? Is it there at the right time – not late and not too early? Your customers are like you in that they don’t want to give up cash before they have to. They want delivery of your product just in time to use it. Another element in this is how much it costs you to deliver. Do you regularly make special trips to deliver low margin items? Do you carry 10 items at once, or do you carry 30?
- Billing and payment process – Sometimes it’s difficult for smaller growing businesses to bill promptly. The focus is on getting product out the door, but it’s billing and collection that puts cash fuel in the tank. How often do you bill, and what are your payment terms? Do you give discounts to promptly paying customers? What is your process for following up on outstanding invoices?Do you know what your daily accounts receivable number is? How often do you pay your suppliers? Do you take advantage of discounts?
One or more of these cash logjams may resonate with you. In each of the processes in the cash cycle you have options: reduce errors, take steps to improve your cycle times, or even change your business model (like Dell computer did when it started requiring payment up front for custom computers). You’re busy every moment of every day. You will have to make a choice to allocate the time to improve your cash situation. We can help you think through it determine the best next steps to take. Wouldn’t you like to have more cash on hand right now?