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What determines cash flow inside your business?
If you’re reviewing cash flow regularly, you already know what company cash flow looks like on a monthly basis (if not, read this blog post immediately). But what’s harder to parse are the factors, often known as drivers, behind that cash flow.
Plenty of smart people have done a lot of thinking about this topic, so I want to acknowledge that we’re standing on the shoulders of giants here. The “CASH” chapter in Verne Harnish’s Scaling Up, along with Gino Wickman’s “8 Cash Flow Drivers” tool, are both helpful frameworks.
If you want to optimize cash flow, I suggest starting with two simple questions:
How can you increase cash flow?
How can you improve cash flow?
Recognize that you’re playing in a sandbox to come up with these answers. Although there’s a good set of suggestions to get you started, your responses will depend on your industry, your business model, and your customers. At the same time, don’t assume that too much is static inside your business: a price increase or change in payment terms may feel impossible, but it’s probably just a few painful phone calls away from being a reality.
How can you increase cash flow in your business?
This question essentially asks, “How can we bring more cash into this company?” The most obvious answer is to juice up your revenue and/or profitability. Common tactics include:
-- Getting more customers or clients -- Cutting expenses -- Increasing your prices -- Adjusting your business model to be more profitable -- Including add-on services, maintenance plans, or bundled packages in your pricing
Which tactics are appropriate when? That depends on how functional your business model is right now, whether the market can support a price increase, and how many unnecessary expenses you have inside your company (cutting expenses too much can cut off the air supply to your business).
How can you improve cash flow in your business?
This question is slightly different, as it’s more focused on throughput: how quickly a dollar moves through your company. Improving cash flow is often related to processes in your finance or operations departments. Common tactics include:
-- Invoice customers more frequently -- Shorten A/R cycle (reduce the number of days a customer has to pay; send more frequent follow-ups to ensure timely payment) -- Expand capacity to finish projects more quickly if payment is tied to project completion -- Update payment terms for project-based work -- Switch to a monthly recurring revenue (MRR) model -- Change your refund or return policy (note that a longer policy may actually be in your favor) -- Reduce the number of errors or mistakes that require rework -- Create better processes to improve your team’s efficiency
Incorporating Cash Flow Strategies Into Your Business
Once your team has spent time reflecting on the factors that drive your cash flow cycle, identify a few to track and report on each week. As with your company scorecard, you may need to iterate before you find the drivers that make the biggest impact.
Test out your hypotheses by incorporating these drivers into your company’s business operating system. Put key metrics on company or departmental scorecards (e.g., average length of A/R process). Build them into your annual goals or 90-day Rocks (e.g., xx clients switched to MRR plans). Once you’ve made a few changes, incorporate them into your company budget and look for them to be reflected on the P&L.
If your company struggles with cash flow (or if you aren’t sure where you stand on cash flow, period), contact us to connect with one of our consultants. Together with our Finance Services team, we can help you assess and adjust the financial levers that will improve and increase cash flow inside your business.