Improving Your Cash Conversion Cycle

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American-963191_1280Why should you concentrate on improving your cash conversion cycle?  Improving the sales cycle reduces your investment in receivables, work-in-process, and inventory.  This allows you to increase sales without running out of cash.

Many businesses fail when they first start.  But another area of danger is when a company is growing faster than their cash conversion cycle works.  The company may be profitable but still end up filing bankruptcy because they run out of cash.

Increasing sales is the key to business growth, but improving your cash conversion cycle is the key to surviving when you increase sales.

These are some of the most common steps many successful business owners take to increase their cash balances.

First, speed up your sales cycle to reduce your production costs.

Create an automated sales funnel.  Most businesses don't have a sales process that:

1)    attracts qualified leads,

2)    converts these leads into customers, and

3)    automatically upsells and cross-sells them into additional products and services.

Plan the next sale as soon as you deliver the product or service.  Your customers are the easiest people to sell to.  They already know you, like you, and trust you.  It only makes sense to have a plan to get your next order from them.

Look for recurring revenue opportunities.  Almost nothing improves cash flow more quickly than having sales coming in every month.  Explore different ways to create recurring revenue.

Set up a system for increasing referrals from every customer.  People have been burned by giving referrals, so instead I would ask for "quality introductions".  Your current customers are the easiest sales.  The next easiest are your customers' friends and family.

Next, speed up your product production and delivery.

Improve your systems to speed up the production.  Systems are the key to quickly delivering a quality product or service every time.  Check out our November 2012 issue for more information on creating, documenting, and improving your operating systems.

Deliver the work quickly.  We’ve had it happen here.  I finish some work and then I’m so busy with the next project that I don't notice the first client hasn’t come in for a month.  Well, if they don’t know that the work is done, they’re not going to pay the invoice for it!  What’s worse, a month later it may no longer have any value to them.

Now speed up the collection of your receivables.

Send the invoice promptly.  This is often overlooked.  Obviously, you can’t get paid until you invoice.  Now if you’re in sales, retail, or the restaurant business, this doesn’t really apply, since the customer expects to pay at delivery.  But if you’re in any of the service industries or construction fields, get those invoices out as soon as possible.

Consider prepayments with the order.  Every business I have worked with that does this never seems to have a cash flow problem.  Don't discount this, even if it isn't normal in your industry.

Negotiate progress payments for large sales.  Write these into the contract so that your cash received more closely matches what you need to pay your vendors and employees.

Collect your receivables.  If you can’t eliminate receivables using any of the ways we have discussed above, collecting the invoice is the most important thing you need to do.  Remember, it’s not a sale until the money is in the bank.

Offer discounts for prepayment and/or prompt payment.  I would only recommend this if you can't get a line of credit from a bank.  Interest rates are so low right now that it is often much cheaper to get a line of credit than offer prompt payment discounts.

Sell your invoices.  This is called factoring.  One warning:  Be sure you have good cash management skills and a budget.  One problem I see with companies that factor is that they pocket the money that’s supposed to be going toward paying their vendors.  This causes many businesses to get even further into trouble.

Arrange a line of credit with a bank.  This is much harder than it used to be.  It is more common now to use invoice or job financing.

Finally, control the money being paid out.

You can’t really put off paying your staff.  But you can control employee costs by improving systems so that the work can be done by lower-skilled workers as much as possible.  Doing a complete staffing review periodically will eliminate excess staffing.  Outource or use temporary hires for any non-recurring projects.

Take more control over when you pay your vendors.  Don’t be afraid to call your vendors and say, “Hey, I’m getting slow-paying customers right now and I need a little more time.  You want it in 15 days.  Can I get 30 or 45-day terms?”  They have to make a sale, too.  Most vendors would rather work with you than risk not getting paid at all.  Try to negotiate longer terms.  Don't be afraid to let them know a competitor is willing to give you better terms.

Periodically shop for better pricing from all of your vendors.  Most business owners stay with who they know.  It is easier and usually less risky.  Even if you don't want to change vendors, you can use the competitor's lower price to negotiate a better deal from your current vendor.

Change your payment date with your landlord.  Sure, your landlord wants to get paid on the 1st of the month, but if you can’t make it by then, don’t be afraid to delay it to the 10th or the 15th of the month.  Sometimes you have to call the landlord and say, “Look, the beginning of the month just doesn’t work very well for me.  Can I pay on the 15th without a late fee?”  They’re not going to like it, but they’re not going to risk losing you, not in this market and especially if you have been a reliable, long-term tenant.

Having cash in the bank is not an accident; it’s the result of actively managing all parts of your business, especially your sales-to-cash cycle.  So if you want to have more cash in your bank, start with the hard work that we’ve outlined above.