Monday, 25 March 2024 04:45

Here’s why cash flow should be the main focus in your company

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Traditionally, when founders start a business, the first thing they seek is financing, even before mastering the numbers. They mistakenly believe that generating the first sales indicates the liquidity and health of the business.

I have known companies that generate up to $5 billion in sales but, behind the scenes, lose half or more of that in operational expenses. Sales are important but not the true indicator of the cash the company has.

Cash is the lifeblood of companies. It is the fuel that propels them forward and helps them grow. You can keep a company moving with operational issues or a deficient strategy but without cash, the game is over. So, how can you bring your enterprise to optimize and grow its cash flow to avoid coming to a halt?

Often, when founders approach banks or investors, it seems like they speak a different language because what matters to financers is not how much has been sold but how much cash flow there is.

Therefore, the best time to approach investors is when the company is stable and you don't have cash problems – they will see your balances and know you are ready to inject that money into growth, since you don't need to use it to pay off debts.

To understand your cash flow, you need to know everything about your cash conversion cycle, which is, the time it takes for every penny invested in your company (whether in production, sales, marketing, etc.) to come back to your pocket.

The longer your cycle, the more time it takes for that capital to return to you, and the greater your cash flow problems will be. This happened to the technology company Dell.

When Michael Dell started his company in 1984, he ran it in the typical way a business operates: He deposited cash to get inventory to produce computers, assembled them, sent them to a distribution center, and then waited for customer sales.

Dell took between 60 to 90 days to see his invested capital return. In a short time, he ran out of cash, and as a result, was on the brink of bankruptcy.

Michael Dell, along with Tom Meredith, quickly reconfigured this model: They gave customers the opportunity to design and configure computers according to their wishes and once they paid, production began.

This way, Dell reduced its cash conversion cycle from 63 days to minus 21 days, having enough capital in advance for production.

The more you know about your cash flow, the more options you'll come up with to benefit your company. Simple strategic changes can make a huge impact, like reducing costs or increasing your price by 1 percent, according to cash flow expert and co-founder of Cash Flow Story, Alan Miltz. 

How can you prioritize cash to favor your cash flow? Consider models that utilize recurring payments (such as monthly subscriptions used by streaming, phone, and service companies), prepayments (like Dell, Tesla, and Threadless), or memberships (like Costco).

These models ensure enough oxygen to be strategic and seize opportunities when they arise.

After coaching CEOs for more than 10 years, I've learned and emphasized to business leaders the importance of having at least three months of working capital in cash to anticipate any eventuality.

It is time to master the numbers so that cash is not one of your main concerns but instead becomes a catalyst for your growth.

 

Inc

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