Should I raise my prices? What happens if I lose business? My overheads have risen by 1.5%, should I raise my prices by 1.5% or more? Which cash flow management decision is the right decision?
These are the questions I hear CEOs and business owners of growing businesses anguishing over. Managing business growth as well as cash flow management, working capital and profit are what causes sleepless nights for many growth-focused business leaders. I see time and time again busy CEOs not being able to see clearly the real impact of decisions around pricing, sales or inventory. I see deferred decisions and the financial impact of these delays. I have seen growing companies that look good on the surface, with revenue going up and net profit percentage still the same, and yet they were going broke. They were growing but they were running out of cash. Why? Because they couldn’t work out how to manage all the different financial levers in a business to achieve scalable sustainable business growth.
Growth Sucks Cash
The fact is that growth sucks cash out of your business rapidly. Cash is the oxygen required by your business, so understanding cash flow management, knowing your cash conversion cycles and improving them is vital for growth. You can survive a long time without profit, but without cash, you will quickly fail.
A reason why businesses find managing cash difficult is that it’s not easy to run the numbers to see the impact of making different financial decisions. It’s this uncertainty that slows down decision making. But with every delay, how much cash are you not putting in the bank? It can be substantial over a couple of months in a rapidly growing business.
Cash Fuels Growth
As the saying goes, “revenue is vanity, net profit is sanity and cash is reality.” Every company needs a cash flow management strategy. A good cash strategy aligned with the overall company strategy is required for all businesses, especially those experiencing rapid growth. The right cash strategy also impacts net profit and valuation, while reducing debt and keeping it down.
Understand Your Cash Conversion Cycles First
The first step in getting on top of cash flow management is to understand your Cash Conversion Cycle. The Cash Conversion Cycle is a measure of how long your money is locked up in production before turning into cash. You can read more about this in my article “10 Ways To Reduce Your Cash Conversion Cycle”.
Once you have an understanding of your Cash Conversion Cycle, the next step is to work out how to reduce it. This is the critical next step that can transform a growing business.
Next Comes Cash Flow Management
Every company’s cash flow tells an important story about the financial health of the business. To ensure your cash flow position is strong now and for the long-term, you need to consistently assess your position with the use of practical and actionable tools.
The Best Cash Flow Management Tools
The best cash flow management tools for growing businesses that I have used are:
This tool helps you to brainstorm ways to improve your cash conversion cycles. It breaks down the cycle into four main components – sales cycle, deliver cycle, billing & payment cycle and production & inventory cycle. (Note: even service firms have a form of inventory if they have underutilised their staff. )
This tool helps you measure the impact on cash when you make changes to seven different financial levers. The power of one refers to the benefit to cash flow if a 1% or one-day change is made. The financial levers are price, volume, cost of goods sold, operating expenses, accounts receivable, inventory/work in progress and accounts payable. I recommend this tool to all growth-focused business leaders.
When working on a cash strategy with my clients, we often use the Cash Flow Story software to give us instant answers. This very handy software tool helps us to set a cash strategy that aligns with the overall company strategy and direction. I have seen the impact of this software tool in practice with clients able to make quick and calculated decisions that have a positive impact on cash and profitability. I recommend this software tool to all business leaders looking to get a better night’s sleep!
I recently worked with a growing business in the distribution industry who were very worried about their working capital as they were growing. The CEO thought that they had a pricing issue and so we used the Power of One tool to assess the impact on the business by changing pricing by 1% vs reducing debtor days by 15 days, reducing overheads by 2% and, improving stock days by 15 days. We found that pricing was not, in fact, the only issue at all – that also reducing debtor days, stock days, lowering overheads were the levers that substantially increased cash flow and working capital. In fact, all the levers added together meant an increase of 56% working capital percentage, 78% increase in net profit and a large increase in company value. These changes meant the business could self-fund their growth for the next year.
I encourage you to set aside an hour each month to work with your management teams to brainstorm ideas to improve each of your cash cycle components and use the Power of One tool as part of your annual planning to set your cash strategy that supports your overall company strategy. It works – give it a try.
As with all strategy and tools, it is important to review and make adjustments during the year to meet the objectives of your cash strategy. This is the true power of these tools – they keep businesses and their management teams focused and aligned but also able to respond and change direction when needed.
If you are a business leader who is frustrated by your growth rate or losing sleep worrying about managing the growth, cash and profitability of your business, then you need a cash strategy to support and align with your business strategy. Start by looking at these tools and if you need help implementing a plan, get in touch today.