During a Cash is Clear Mastermind recently, I was asked, "How do you calculate the cash conversion cycle?" My response...
"I don't calculate the cash conversion cycle for clients!"
It's not a good use of time because a single number does not mean anything in a vacuum.
What do I focus on instead?
I focus on the component parts of the cash conversion cycle and if they are optimized.
"Optimized" means they are the right terms, conditions, and business strategies to optimize the business.
For example, the cash invested in inventory starts the cycle for a manufacturer.
The automatic response and conventional wisdom is, "Reduce your inventory!"
My recommendation: Analyze your inventory to understand where there are too much, too little, and "just right" amounts.
You might find that overall, you have too little of a lot of your inventory and need more.
You'll also find obsolete inventory, overstocked inventory, and products that should be end-of-lifed.
You can also analyze...
Contrary to popular belief, the steps you need to make real changes in a company's cash flow is not in their financial reports.
Each of those reports may give hints on where to start looking for opportunities. They may show you the symptoms the company is dealing with, but they won't show the underlying cause of the problems.
The real opportunities come from understanding the stories behind the numbers.
Here are some keys to finding the underlying cause of the problem:
Can you imagine your banker handing you a $1,000,000 check just for changing the way you pay for purchases? Here’s the real story of how one company did this.
My good friend “Divver” (yes, that’s what we call him) is an incredible banker who is always looking out for his clients. So he took the time and effort to convince a business owner to shift his purchasing habits. The bank had a new purchase card program that gave cash back.
The owner took some convincing to see the wisdom of taking the time and effort to make the shift. The percentage was not much, but Divver knew that it would add up because of the size of the company.
For a full year, everything they could possibly put on the card they did:
After the first full year Divver delivered a check for $1,000,000.
When was the last time you took a step back and asked yourself, “Is there a better way to really grow my practice?” "Is the path I'm on leading me in the direction I want to go long-term?"
There are dozens of “quick fix” tactics competing for your time and attention, but will any of them drive your practice to the next level? Will any of them provide the work/life satisfaction you're looking for? Probably not, and here’s why:
They don’t address the root cause of job dissatisfaction or anemic growth.
While you’re trying to figure out your best social media channel, how to get found on the Internet, or the best way to get a promotion, you should be looking at:
There is no such thing as a “Magic Bullet” for increasing sales. A quick fix. A genius idea. The “one thing” that makes a business successful by generating huge sales and enormous profits.
I wrote about “There’s No Magic Bullet for Increasing Sales” and I was amazed at the response! There were two types:
So, I lied. There is a “magic bullet.”
In my article, I explain that even the best company's outstanding performance can't be explained by one single activity, department, promotion, product, etc. What I failed to mention is that there IS something that every company can do that ALWAYS leads to improvements, and long term, will lead to success:
Consistent effort to implement incremental improvements.
If you didn’t have a cash flow management model before, what are you waiting for?
Or do you still think you can actually manage your company with a P&L, balance sheet, and statement of cash flows? If you believe the best way to run a company is with backward-looking, historical documents, then you probably also think that the safest way to drive a car is through your rearview mirror!
History- yes, you can learn from it, and not repeat your mistakes, but it can’t tell you what’s coming down the road!
Cash Flow Management: Look forward!
What’s coming in?!
What sales are being made?!
Who owes you money that needs a reminder call?!
What are expenses today, next week, and next month?!
What will your bank balance be after you run payroll?!
Some people are saying, “But David, it’s too late!” It’s never too late to put good business practices into place unless you’re giving up without even trying.
Am I being too harsh? Maybe.
But sometimes it...
We need to be prepared for business loan delinquencies.
Special Asset departments of banks have been busy. Really busy. The Special Asset department of a bank is the group of people who work with problem loans. If you need to work with them, they will decide:
The Special Asset employee at the bank can become your best friend or a challenge to work with, depending on how you deal with them.
They want information.
They want explanations.
They want realistic forecasts.
They want action plans.
They want you to succeed so the loan is paid off.
How do they know that they'll get payments? The basic tool that is used is a 13-week cash flow model.
Solid, realistic sales forecast.
Expenses under control.
Planned payments to vendors.
I'd love to be connected to special asset managers. Please, introduce me if you know any.
E-mail me at [email protected]
I’ll never forget the day my father, Neil, stood on a box in front of the entire company. He was the President; I was 22 years old and was the entire “IT department.” 90% of the 150 employees worked in the factory.
He stood up and said, “Our company is in trouble, but we have a plan to survive and then grow again. Part of the plan is asking all employees to take a 10% pay cut.
“The senior staff will be taking a 20% pay cut.
“I know that this is not easy for anyone, but we commit to raising the wages back as soon as possible. Any questions?”
After a few complaints, a tall and broad man named “Big John” raised his hand. He said with a crack in his voice, “I’ve been laid-off twice. No one ever asked my opinion or gave me a choice.
“Thank you for asking. I support the reduction 100%.”
Everyone fell in line after that.
The company survived and wages were eventually restored.
The lessons I learned?
Let me tell you a story. Tony gave me 3 weeks to train his 20-year-old son to be a financial guru.
Tony ran a collision and towing company that was in trouble. His father started the company and his son, Frank, wanted to take over. The fundamental problem with Tony׳s plan: he wanted Frank to start at the top.
I love family businesses, but they’re often dysfunctional when younger members are given responsibilities well beyond their current capacity.
Frank understood the number theory, but he didn’t know the business. He didn’t realize:
The biggest challenge? Nobody had taught Frank how to dig deep by asking the right questions. He wasn't prepared to do what was asked of him.
If you own a business that is facing challenges, let me know. I know how to dig deep quickly and effectively and offer solutions to fix...
I've worked with people who get a credit line or a working capital loan, and have no idea of what happened to it.
They are unhappy and upset that they took the loan, and feel like they made a mistake. They did make a mistake, but it is not taking the loan. The mistake is spending the funds without understanding where or why, instead of using the funds for targeted expenses.
In the past, I have talked about how to plan to use loan funds that are coming in from PPP, EIDL, or commercial financing sources. Here are the basics:
1. Use a separate account for loan funds to ensure they are used for the planned purpose
2. Use a 13-week cash flow model to plan the use and the repayment
3. When you can, put excess funds back into the loan account so you don't just spend the "extra"
If you want, subscribe to my YouTube channel to make it easy to find all of my videos, including a webinar where I discuss this very issue.
Question: What do you think the biggest challenge will be for companies...