25 Aug 3 Ways to Get More Cash in Your Business
We talked last week about the stumbling blocks to growing your company. One of those was that growth always requires cash. So, how do we get more cash flowing through your organization? First, we need to understand where the slow down is that’s requiring more cash. And second, we need to apply some strategies to address the slow down.
Which cycle in your business requires cash? Most businesses have three distinct cycles in their business: sales, delivery, and billing and payment. The fourth cycle if you manufacture a product is the production cycle. Here are some common situations that can require cash.
Sales cycle: You’ve brought on a sales person and are paying them a $75,000 salary and for the first 12 months, they’ve only brought in $50,000 in sales with a 50% gross margin of $37,500. At the moment, you’re $37,500 upside down because the gross profit isn’t covering the salary. That’s a cash requirement of the business because of the growth you expect.
Delivery cycle: If you run a contracting business, at your current crew levels you could be 30 days out on your scheduling to deliver on the contracts you and your client have committed to. If you increased your staffing levels, you might be able to deliver faster, but there’s no guarantee that there’s another contract in the pipeline you can put the new crew on once the contract is completed. The labor for the crew that sits idle waiting for the next contract is another potential cash drain on the business.
Billing and payment cycle: Most businesses buy and sell on net 30-day terms. So, you’re at least 30 days away from receiving payment when you bill, sometimes even 40-45 days because not everyone pays on time. If you need to fund payroll and you’re waiting on receivables to come in, the timing of that may not work in your favor. This may cause you to dip further in to your cash to meet payroll, which is another cash requirement.
We’ve identified a few cash problems. Now here are a few ideas for solutions. To get cash moving faster in your organization, you need to identify the issue. Do you need to shorten cycle times, eliminate mistakes or improve your business model?
For the sales cycle, you could shorten cycles times by asking your sales person to increase their calling activity. The level of activity they adopt could be a limiting factor in their production. To avoid mistakes, be sure they’re calling on the right type of clients that uses your products and services. To improve the business model, maybe you’ve tried an Internet based strategy for sales when a person-to-person direct approach is better.
For the delivery cycle, you could shorten cycle times by asking your people to commit to a gradual continuous improvement of 1% of cycle time every month. If successful, over the course of a year, you will pick up 3.6 days if you have a 30-day delivery cycle. That’s a 12% improvement. To avoid mistakes, make sure you have a checklist of items needed to successfully complete the job and someone checking all the boxes to be sure it’s done right. If you run 5 person crews, maybe improving your business model to 6 or 7 person crews will give you more efficiency than what you previously experienced.
For the billing and payment cycle, many businesses have set days that they invoice, some invoice once a month. Shortening the cycle time from monthly to weekly invoicing could make billing more efficient and possibly improve collections too. Before an invoice goes out, makes sure it’s checked to be sure there are no mistakes on the bill. Often those mistakes aren’t uncovered until it’s time for payments and extend the cycle. One way to improve the business model could be to go to electronic billing and payments via ACH to minimize mail time to and from the client.
Understanding where you can shorten cycle times, eliminate mistakes and make adjustments to your business model to improve it is key to cash flow. Setting up processes to affect change can go a long way in getting cash to flow faster in your organization.