Is your cash flow, or lack of it, hurting business? Are you struggling with delayed receivables, committed outflows and less-than-optimal financing options? If you are, you are not alone!
Fifteen-year old Industrial equipment supply and installation client – Growth in the economy encouraged the CEO, Mr. M, to double his sales team. In the first year after the team was hired, sales increased by over twenty percent, profits increased and bonuses were paid. In the second year, several large customers reneged on their confirmed orders and delayed payments. With piling up inventory and increased bank debt and financing costs, Mr. M started defaulting on committed payments to banks and suppliers and sought our CFO support services. A year later, Mr. M sleeps well having reduced his sales team with performance driven KPIs, tightened his credit portfolio with customers, transformed his business from 70% wholesale to 60% retail (cash and carry) with reduced revenues and higher margins and bottom line.
Twenty-year old technology service provider – Demand led growth in the market for technology services gave the MD Mr. K the opportunity to diversify the business into hardware equipment supply and turn-key software installations. The goodwill in the market enabled the company to exponentially grow revenue in the short term. However, unexpected recessionary trends delayed and / or deferred the software installations. Equipment supplied got paid later resulting in severe cash crunch. Lack of access to SME bank finance and severe pressure from vendors and principals compelled Mr. K to downsize business on all fronts including the cash cow – technology services business. Facing challenges, he sought our advice. Six months later, Mr. K is a happy businessman leveraging on his strong market network and contacts, selling advanced technology using outsourcing model for both his technology and software service, exiting the equipment sales business and reducing his workforce to bare minimum.
Two-year old tech startup – Passionate and hardworking, Mr.L launched his tech startup to help manufacturing businesses with an early warning system on potential manufacturing bottlenecks and service issues. Based on advice from “well-wishers”, he invested in branding and an up-market office complete with coders and administrative staff. He quickly burned his way through his capital (all of his savings) and was then looking for “angel” investors to help him continue to develop his product. With our help, nine months later, Mr. L has crowdsourced his capital with his employees and some customers becoming co-owners, they have reduced fixed costs by moving to a utilitarian warehouse in the industrial area closer to his customers to help test his products and reduced overheads to the barest minimum required.
Sounds too good to be true? Yes and these are just three of the many success stories and some not-so-successful stories that we have been part of. The above case studies are just a few examples of how we have helped clients transform their businesses to cash positive and manage the vagaries of the economy better, regardless of pandemic induced recession.
Over the last 10 years, we at Motivaluate (www.motivaluate.com) have been helping small and medium businesses improve their cash flows and grow their businesses profitably. Most business owners complain about how clients do not keep their commitments and the economy lacks sufficient SME financing options. A closer look at client’s financial statements and their business practices showed that while external factors are real, there are a host of internal factors that can help businesses stay liquid and unlock sources of cash to survive during these tough times.
Revenue is vanity, Profit is sanity and Cash is reality! Cash is oxygen in any business. Run out of cash and you are bankrupt, have too much and banks queue up to give you more!
Here are 9 keys that will help you unlock the oxygen in your business now! Maybe not all are applicable to your business, or maybe you need to tweak them to suit your business. My experience says it will.
- Conversations – have strategic conversations with everyone, from your customers to your vendors, lenders and stakeholders and advisors.
- Customers – establish customer credit limits and strictly enforce them. Encourage customers, either financially or otherwise, to settle dues sooner rather than later. Learn to say no to contracts that require investing large working capital unless backed by customer advance or pricing reflects financing arrangements. This may mean making tough choices. Successful business is about making tough choices.
- Vendors – re-negotiate vendor payment terms to ensure a healthy gap between customer payment terms and vendor payments without compromising on quality or timeliness of supply. In my experience – everything in business (except for your core values) is negotiable. The question is, “Are you willing and able to negotiate?”
- Lenders – re-negotiate any existing loans to delay or reduce repayment and interest costs
- Stakeholders – Manage shareholder expectations by informing them of the cash utilization plan. Avoid making dividend payments too early in the business. Inspire employees to apply their discretionary time to meet customer needs.
- Advisors – Having conversations includes reaching out to advisors, mentors and peers for help, knowing what questions to ask, listening and being coachable.
- Capitalize adequately – Create a financial plan to identify capital requirements and thus determine whether you have the cash sources to ensure you have capitalized it well. Most entrepreneurs and business owners lack the skills to create a business plan and to estimate their capital requirements. Growth economies blind them to the need for one. When disaster strikes, it becomes too late to create one. The result is you run out of cash and are forced to wind up your business or operate on survival mode, from one painful cash crisis to another.
- Counterbalance sources and uses – most entrepreneurs are unaware of the nature and uses of cash – they commit the classic mistake of using short term funds from operations to finance long term investments and vice-versa. Your hard-earned profits get consumed by financing costs and since financing costs are hidden in committed fixed repayments, you remain oblivious of its impact.
- Critically evaluate forecasts – Entrepreneurs and business owners are positively inclined about their business and quite often over-estimate their sales forecasts and consequent cash inflows. This leads to higher than required commitments towards inventory – product or manpower resource – and increased committed costs. You need to be your own devil’s advocate, which is tough, or to seek support from experts to validate the forecast.
- Convert stuck inventory into cash quickly – If you are in the product sale business and pile up inventory due to any reason, learn to dispassionately dispose the inventory, sooner rather than later, and convert it into cash. Most business owners hold onto inventory waiting for a better price. If you are in the service business, your bench-strength staff are the equivalent of inventory. If they cannot be transformed into revenue generators, dispassionately separate these employees from the business to keep the cash intact. Again, tough choices, but as the saying goes, “A bird in the hand is better than two in the bush”.
- Control fixed expenses – Constantly review your fixed expenses and ensure it is a “clear and present” necessity to incur. Fixed expenses are silent killers. As fixed cash outflows, they rear their head in frightening regularity and distract the you from more important areas of strategic planning or revenue generation.
- Cash flow familiarization – most business owners ignore the cash flow statement. Ask any business owner whether they have read the Cash flow statement prepared by their accountant, and most likely the answer is “What cash flow statement”? A historic cash flow statement prepared by your accountant will help you identify the comparative cash flows from different sources and give you insights on actions you need to take to maximize it. A conservative projected cash flow statement will help you identify and prepare for landmines in the future.
- Calibrate and consolidate systems and processes – Given the focus on forward looking issues and revenue generation, most entrepreneurs and business owners are ignorant of the back-end processes and cash flow holes that exist in their business and that are draining cash. Like a leaky bucket, your hard-earned revenue and cash profits generated in the front-end leak through inefficient processes at the back end.
- Calculate margins carefully – many startups do not spend time on identifying the correct pricing model, usually comparing their pricing to more established players in the market. They also do not identify all the costs that result in the delivery of the product or service to the customer thus generating lower margins that do not cover fixed costs.
Which of the above keys can you use to unlock and maximize cash in your business quickly? Or do you have others that can add to the above? Feel free to share your thoughts with me on firstname.lastname@example.org.
If you are a business owner or an entrepreneur, or an executive who directly impacts cash flows of your organization, join us on the one day “Maximize your Cash Flow” workshop on 9th January 2021. We will help you jump start your year with many more tips and techniques to help you maximize your cash flows. Or reach out to us and we guarantee you that we will listen to you and help you craft a cash flow maximisation strategy that’s tailormade for your business. Contact us @ email@example.com
Shridhar Sampath is the Founder and CEO of Motivaluate Consulting & Training FZ LLC, a company that offers a unique combination of business and financial consultancy services. He is an expert on Leadership, Strategy and Finance and speaks at various conferences and forums on related topics. Shridhar has a CPA from the USA and a CA from India. He is a Certified Master of the Leadership Challenge & Student Leadership Challenge and a Certified facilitator of the Capsim Business Simulation. He is also a facilitator for Duke Corporate Education as a member of their Global Learning Resource Network and Adjunct faculty teaching Strategic Decision making at the SP Jain Global school of Management. Shridhar can be contacted on firstname.lastname@example.org