Do you have the cash to stay afloat (and fuel your future)?
Opportunities happen to those who have cash. In fact cash is like oxygen to your body, without it you cease to exist.
What can you do to improve your cash position today?
Begin by thinking about the cash conversion cycle within your business*.
Your cash conversion cycle has 4 elements:
- Selling cycle
- Make and inventory (stock) cycle
- Delivery cycle
- Invoicing & payment cycle
With your advisor and/or your management team, spend time considering each of the following 3 factors areas across each element of your cash conversion cycle:
- Eliminate mistakes
- Shorten the cycle time
- Improve your business model
Mindless mistakes like mis-writing an order, production errors or the wrong delivery address are incredibly common and their cumulative impact on your cash conversion cycle can be profound.
Start with the sales cycle and then do the same for the other 3 elements:
| Ideas to improve the sales cycle | Reduce cycle time | Eliminate Mistakes | Improve Business Model |
Perhaps the most famous example of a company that revolutionised itself by shortening cycle times is Dell. When Tom Meredith became CFO at Dell in 1991, it had a cash conversion cycle of + 63 days. When he retired in 2001 it was -21 (yes that is a minus!). He did this by streamlining manufacturing, working closely with suppliers and having customers pay in advance.
Do you know what your cash conversion cycle is today?
My favourite example of an organisation that revolutionised its cash conversion cycle by improving its business model is Costco in the US. They wanted to break away from the tyranny of price competition with other big box retailers. They did this by introducing a membership fee that customers pay to get access to their warehouse-like stores.
Membership fees account for around 70% of Costco’s profit and provides a free financing mechanism for its growth.
If you’d like to discuss how you can improve your cash position – contact me.
Read more about organisational agility.
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*Reference: How fast can your company afford to grow? Churchill & Mullins, HBR press, 2001
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