SCVBJ Contributing Writer
Cash is the oxygen that allows any organization to run. Its flow provides for choices, because without a steady stream of cash, the company will gasp and fail.
Your business can survive a long time without profit — but you can’t survive a day without cash.
Even better is having a cash reserve for your business that allows for expansion and growth.
Most CEOs don’t understand that “Growth sucks cash.” Even moderate growth causes many companies to run through cash at a rate faster than they can generate it.
One of the best tools to help manage cash is to calculate your cash conversion cycle, which measures how long it takes between the time you layout or spend the first dollar, whether it’s on marketing, design, or buying products until you get that first dollar (and hopefully many more), back from the sale of the service or the finished goods.
As an example, in the early days of Dell, their cash-conversion cycle was running 63 days. In other words, from the time they first spent a dollar to make your computer until the time they sold that computer to you was about 63 days. (I know many manufacturing companies that run around 90 days or greater.)
So, Dell started focusing on decreasing its cash-conversion cycle. Today, they’re running -35 days. That’s not a typo — it does say “minus” 35 days! When you are a client of Dell, they get your money 35 days before they start spending money making your computer.
How does the company do that? Well, they get paid up front and then, of course, create an order to start making your computer and, by the time they pay vendors, it’s 35 days since they’ve had your money on hand.
Dell has successfully changed from being a bank for you to you being a bank for them.
For your company, imagine a dramatic change from +63 days to -35 days. What would that do for your cash flow? What would that do in terms of removing stress from your life?
I doubt that most companies can see that dramatic of a swing but an improvement of some sort is possible with sharp focus and your time and attention.
Consider what it would mean going from a +40-day scenario to a +10-day turnaround … 30 days of improved cash flow is a lot of money in your pocket that you’re not using lines of credit or other sources to be able to meet the payroll to continue to operate the business.
You can survive a long time without profit but you cannot survive a day without cash, so take time now to calculate your cash conversion cycle. Take a look at how you generate cash and where and when you spend it.
There’s an article in the Harvard Business Review by Neil Churchill and John Mullins titled “How fast can your company afford to grow.” It will provide insight into what the cash conversion cycle is really all about — and help you calculate your own cash-conversion cycle.
Everything in your business depends on cash. Improving your cash flow has got to be at the top of your priorities in 2021.
Ken Keller is an executive coach who works with small and midsize B2B company owners, CEOs and entrepreneurs. He facilitates formal top executive peer groups for business expansion, including revenue growth, improved internal efficiencies and greater profitability. Email:[email protected]. Keller’s column reflects his own views and not necessarily those of the SCVBJ.