‘Revenue is vanity, profit is sanity, cash is king.’ Heard that phrase before? It’s probably familiar to you, particularly the last bit about cash. If you’re wanting to grow your business, you need 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 cold, hard, accessible cash.
The pandemic has brought this into stark relief. Businesses with cash reserves have weathered the storm far better than those without. More than that, they’ve taken advantage of new opportunities and pivoted quickly to maximize their return. In his book, ‘Great by Choice’, Jim Collins looks at smaller businesses and their return on luck. A lot of it’s due to cash reserves. At any one time, you should have at least three times your monthly costs in cash, available and ready to go.
If you’re nodding your head, it’s time to take a step back and look at this critically. How exactly does money move through the system of your business? And are you missing tricks that could fund your future growth?
Examining the quote to cash process
When we’re mapping out the Value Chains and Key Functions of our clients’ businesses, what we’re doing is looking at the quote to cash process. We get down to granular detail, scoring every function red, amber, or green and working out the inputs and outputs of each.
This helps our clients see how quickly money moves through their business. Let’s say you’re a retail company and you want to open a new store. You need to get the clothes designed, have them made, build a level of stock, and display them in the store. Up until the point you open the doors, all of this has been at your expense. It may have taken you six months to get here, and all your working capital is tied up in your inventory.
Maybe you have enough cash to bootstrap your business and open a couple more stores. But how do you open a third or a tenth or a 100th store? Because each time, you’ve got the same working capital tying everything up. To get to 250 stores, you’re going to have to borrow a load of money.
Or do you? Perhaps there’s a way to reduce your requirement for funding to allow you to scale. Are there other strategies to fund the business so that you don’t have to resort to selling equity or raising debt?
Looking at customer-funded growth
Here’s the thing. CEOs often default to borrowing money or selling equity 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 – it’s our book of the week recommendation to our clients. And for good reason. This easy to digest book is a deep dive into the cash-generating practices of Bill Gates and Michael Dell, amongst others.
Dell Computers is a perfect example. Instead of building a load of computers and holding them in stock, they built to order. So, when they sold you a computer, they charged your credit card and then started the build. They weren’t spending any money until they got your cash and once they’d got it, they built and shipped it to you. They also re-negotiated vendor terms, taking them from 63 days to minus 21 – soon they were holding onto the float.
Also mentioned in Mullin’s book is Banana Republic. They started a catalogue and charged $1 for it. This meant they were making money off the catalogue before getting to the main part of their business which was selling clothes. As a result of customer-funded growth strategies, they got the business up to $2 million before they sold to Gap.
Charging in advance
Look at your business model. Is there anything you can Charge for in Advance Consulting firms do this with many of their services. It’s interesting. When I look back at my time as the Owner of ILM, we were focused on increasing monthly recurring revenue which was a stepping stone into large enhancement projects. There were no additional charges for professional services.
But then a shortage of labor and higher demand for our services came along, and the game changed. Yes, we were making a margin on a large chunk of the reoccurring revenue, but not as much as enhancements projects or design work. To keep the economic fundamentals the same, we needed to start charging for more – charging in advance for designing and design/build projects instead of giving this away and not getting paid for all the “busy” work.
The economics of the whole industry changed. If we look back at some of our competitors, they now have a very different business model. It’s been a struggle for many of the providers as they didn’t know how to charge for certain services. It wasn’t in their DNA.
Look at everything you do through the lens of additional charges. Don’t give away design fees, audits, pre-sales, or anything that involves your cognitive abilities. People will pay for these things if they value them. Similarly, your intellectual property – charge for this. And don’t pitch. ‘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. That’s because we know it puts us in a race to the bottom.
Negotiating vendor and supplier terms
Negotiating more favourable vendor terms can make a huge difference to cash flow. At both ILM and other companies I am involved with, our supplies were on consignment from several vendors. We only started paying for it the moment we deployed it. This had a massive impact. Back in 2001, we were buying materials ahead of time. And we paid cash upfront. As we got bigger, our capital requirement went down because we’d become significant and negotiated a far better arrangement.
Similarly, supplier terms. 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 stuck with 30 days because they remembered all too well what it was like to be a smaller business.
Shortening the sales cycle
Another great cash lever is your sales cycle. How can you shorten it? I’ve written about before about the Sales Velocity Formula – it’s a nifty tool that helps focus the mind. Look at the numbers of opportunities your teams are generating, your close rate, average order value and time to complete. Work out what’s holding things back. In his book, ‘The Machine’, Justin Roff-Marsh often points to technical sales as a constraint. So, look at how you can release that.
Make sure you’re charging for pre-sales and not giving it away. One of our clients has gone from not charging for presales to a completely new model. They offer a free half-day, public workshop. The outcome is a chargeable, private workshop that leads to managed services. It’s a highly effective sales funnel that takes potential customers from free, through chargeable to fully managed services. The age-old problem with service businesses is that customers have no idea of the quality of your offering. They need to try it out. And you need to offer them this opportunity through your sales and marketing process.
Make it theatrical. Here’s something seemingly insignificant that made a massive difference to our conversion rate at ILM. Homemade cake! Yes – really! I’d experienced a welcome tray at? What If! that had impressed me so we started serving cake made by the mother of one of our team to prospective clients. This arrived every time they came to us for a meeting. It instantly said, ‘We’ve made an effort’ and gave prospective clients a sense of the service they could expect.
To be fair, it was great cake. Huge, chocolate and deliciously homemade tasting. A bought cake wouldn’t have cut it. Our quote conversion rate rose from 40% when we visited clients to 80% when they came to us and were given John’s mum’s cake!
Examining production, inventory, billing and payment cycles
Once you’ve sorted cash flow in the sales cycle, take a good look at production and inventory. Where is cash tied up here? What’s your turn? How can you have this on vendor terms so it’s not costing you anything? And how can you speed it up?
Two of our clients Maricopa and S-State have an innovative approach. Once they win a piece of business, they use contractors to deploy it which reduces their human inventory cost. If it turns into regular business, they move towards taking these contractors on full time. Maricopa stood up an entire revenue stream around data analytics, using contractors in the first instance and then switching them into full-time employees.
Finally, 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 that do this differently.
Ultimately, get your Executive Team together regularly to focus on cash flow. There are some great templates and tools in Scaling Up that are a huge help. Brainstorm ideas and decide on the ones with legs. And every six to twelve months, re-visit to see what’s worked.