As Harnish says, “growth sucks cash” and many businesses either fail or face significant losses due to not keeping an eye on their cash flow. It can be easy to overlook cash flow and focus on other business processes, but cash flow is much more important than some think, even more so for scaling up a business.
Cash Conversion Cycle
As Harnish says, this term is simply how long it takes for money that has been spent to find its way back through the business and into your pocket. Neil C. Churchill and John W. Mullins have a Harvard Business Article that details how to calculate this, titled “How Fast Can Your Company Afford to Grow?”
Now, it is important to monitor the movement of cash through the business, but without action the cash will continue to move in the same way and possibly make scaling up impossible. If that may be the case, there are several ways to improve cash and returns or reduce your cash conversion cycle.
The Power of One
The “Power of One” is an idea that Alan Miltz, Joss Milner and Nathan Keating, of Australia’s Cash Flow Story organization, coined. The term refers to the possible cash flow advantages gained by a 1% or one- day change made to each of the 7 financial “levers” presented here. This team co-authored the chapter by the same name from Verne Harnish’s Scaling Up: How a Few Companies Make It…and Why the Rest Don’t.
- Price: You can increase the price of your services and products.
- Volume: You can retain the price, but sell more units.
- “Cost of goods sold/direct costs: You can reduce the price that you pay for your raw materials and direct labor.”
- Operating Expenses: You can reduce operating costs.
- Accounts receivable: You can collect from debtors quicker.
- Inventory/WIP (work in progress): You can rid yourself of stock you have available.
- Accounts payable: You can reduce the speed of payment to creditors. Verne also mentions three categories where you can make more improvements.
Verne also mentions three categories where you can make more improvements.
- “Eliminate mistakes”
Harnish claims that mistakes tend to be a common reason for customers paying slowly. These mistakes can range from invoice errors to recessions in the financial sector, which can be combated by changing the business model from a cash perspective.
- “Change the business model”
One popular adjustment with generally high results is getting customers to fund the business like some businesses do with membership fees. Verne Harnish’s article “Finding Money You Didn’t Know You Had” offered other sources of cash besides loans and investors.
- “Shorten cycle times”
Recommended Reading
- Neil C. Churchill’s and John W. Mullins’ Harvard Business Article “How Fast Can Your Company Afford to Grow?”
- Victoria Medvec’s video course, “High Stakes Negotiation”, on scalingup.com
- Verne Harnish’s article “Finding Money You Didn’t Know You Had”