To kick our 2019 content series off right, we’re putting our focus on the lifeblood of every business – Cash.

For this topic, we reached out to two of our Gravitas Impact premium coaches, Doug Hershey and Keith Upkes. Both of these men provide clear insights on cash-flow struggles for small to mid-sized businesses, as well as some pointed, actionable advice on how businesses can increase, manage, and protect their cash reserves. Read on to see what they had to say!

1. What are the challenges and obstacles small to mid-sized enterprises are facing that make it difficult for them to increase cash flow?

Hershey: First, there are market pressures. These include competition driving prices down, customers demanding price decreases, suppliers raising prices, increasing labor costs, increasing borrowing costs with rising interest rates, and uncertainty in the geopolitical sphere.

Then you have a lack of focus and clear accountability. Business leaders can become consumed with sales and net profit, and cash can become an afterthought. But cash is king, so make it a focus. Fear can also prevent us from moving forward. There can be a fear around raising prices or having that tough conversation with customers who are not paying on time.

Upkes: Profitability. Too many businesses are so eager to borrow or take on investors without regard for profitability.  To be less dependent on outside financing, small businesses need to “get to” or increase profitability.  More profit equals more cash to invest in people, equipment, marketing, etc.

2. What can businesses do to start maximizing cash flow immediately?

Hershey: Begin a daily cash flow report (what’s coming in and out, and cash balance) and start bi-weekly and monthly forecasting of cash. Then set some targets around cash as you do with revenue and net profit. Determine how much cash you want in the bank to weather storms. Next, contact customers who are past due. Businesses get into trouble when they become passive about past-due receivables. Remember, you are not a bank. Lastly, learn your cash conversion cycle (CCC). This metric takes into account the duration of time it takes your business to sell your inventory, collect receivables, and pay bills without incurring penalties. The formula is simply: inventory days + accounts receivable days – account payable days.

Every CCC is made up of four cycles:

  1. Selling Cycle
  2. Make/Production and Inventory Cycle
  3. Delivery Cycle
  4. Billing and Payment Cycle

You should review each of these cycles with a small team and find out what mistakes are happening (and how they can be eliminated), as well as what steps can be taken to shorten the cycle times.

Upkes: Review the pricing strategies in your market and look for opportunities to increase prices.  Your costs have increased so your pricing strategy needs to follow. Also, look over each of your customers and waterfall graph them by profitability. Any unprofitable accounts should be re-negotiated or terminated

3. What kind of long-term strategies for better cash flow should these small/mid-sized businesses start utilizing?

Hershey: Implement the Power of One exercise on a regular basis. This is a great exercise where we look at seven variables that impact cash flow and EBIT. These are:

  1. Price Increase Percentage
  2. Volume Increase Percentage
  3. COGS Reduction Percentage
  4. Overhead Reduction Percentage
  5. Reduction in Receivable Days
  6. Reduction in Inventory Days
  7. Increase in Payable Days

We then look at the last 12 months of EBIT and cash flow to see how these numbers would be impacted if we increased variables 1-4 by 1% or adjusted variables 5-7 by 1 day. Using this “what if” scenario, we can look at the variables that make the biggest impact and agree on a specific action. Then we assign accountability and goals to be accomplished in the next 90 days.

Upkes: Review your vendor terms and determine if they are too restrictive.  Your vendor payment days should be equal to or greater than your accounts receivable collection days. If your vendor days are shorter you will quickly exhaust any new cash flow you are generating.

Begin accepting credit card payments if you haven’t already.  The merchant fees will be offset by the increased cash flow. You’ll also want to invoice customers quicker and process credit card payments immediately. I had a client who started invoicing weekly instead of monthly and processed credit card payments weekly.  The increase in their cash flow was more than a quarter of a million dollars. This had an immediate effect on their ability to continue funding their growth without borrowing.

4. Last year, numerous financial reports warned of an economic downturn in 2019. What can small/mid-sized businesses do to insulate themselves from any potential impact?

Hershey: Get prepared asap. Start building a cash cushion if you don’t already have one. Freeze hiring, cut slow moving inventory, fine-tune your processes, and cut discretionary expenses. That said, don’t automatically start cutting marketing expenditures. Maintaining a base level of marketing can be beneficial with customer acquisition, especially if your competition decides to cut their marketing budget. Strengthen your network. Rely on your relationships with your bank, accounting firm, peers, and suppliers to support you. You don’t have to go it alone.

Upkes: Start to diversify. Do not be overly dependent on a single client or industry for the majority of your revenue. I’d also ask vendors if you can shave off 1% of purchases. You’ll be amazed at how many will give you a price reduction.

5. What can the coaches do in 2019 to help their clients who might be struggling with cash flow?

Hershey: Have a pricing process and assign accountability. Pricing is critical to your business. How do you price based on costs or value? How often will you change pricing? How can you add more value to compete less on price? What happened the last time you raised prices? You can also implement processes to drive costs out of the business. Constantly look for waste within the organization.

Upkes: First, do a CCC exercise every year and review it with the client to help them find cash leaks. Second, demand they institute a 36-month cash flow goals. Third, help them institute a 12-month rolling cash projection.

1. Start reporting on cash-flow on a bi-weekly and monthly basis.

2. Set targets and goals for cash flow.

3. Learn your cash conversion cycle.

4. Implement the Power of One exercise.

5. Review all outgoing expenses and slow-moving inventory. Cut where you can.

6. Get serious about past-due invoices. You are not a bank!

7. Accept credit card payments and consider invoicing weekly.

8. Diversify your clients.

 

At Gravitas, we provide our coaches with the best tools, community, and learning for mid-market businesses. As a Gravitas coach, you can make more money, work less, have freedom in scheduling & travel, and make a bigger impact on your life and the lives of others. If you think you have what it takes to join the ranks of our world-class coaches, just follow this link.

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