Are You Prepared for 2021 With Enough Cash?

Well, 2020 is just about done, and as we move in 2021, are you and your business prepared? Regardless of how COVID has impacted you, the economy is slowing, so you can expect cash to get tighter as suppliers expect payment sooner and customers pay later.

With a vaccine on the horizon, companies need to be prepared to take advantage of the improving economy when we get there by weathering the current slowdown and positioning themselves for growth. As we look at the potential growth ahead with an improving economy, do you have enough cash to:

1. To get through the winter.
2. Invest in new technologies and systems to stay relevant or take market leadership.
3. Hire the talent you need to take market leadership or get back to where you were before COVID.
4. Invest in product/service development to take advantage of changes in the market due to COVID.

If your answer to 1 is negative, you are in trouble. Companies don’t go bankrupt because they lose money; rather, they run out of cash. Cash is like oxygen: if we run out of it, we die. If your answer to 1 is yes, what about 2 – 4? If you want to be in a strong market position in H2, you need to be investing now.

So, if you can’t answer 1 – 4 in the affirmative, what are you going to do? Remember, YOU CANNOT CUT YOUR WAY TO GROWTH! The easiest thing is to get bank financing. If you have a bank line or your bank will lend you the money, great! However, if not, things are a little more difficult. Please don’t take advantage of those letters, flyers you all receive offering quick financing. The interest rates are usurious and over 40% in many cases. There are other lending alternatives, and contact me if you need to discuss some.

However, what about self-funding? Have you looked at how you can generate the cash internally?

Cash Conversion Cycle

There are four basic cash conversion cycles in a company:

• Sales Cycle
• Production & Inventory Cycle
• Delivery Cycle
• Billings and Payment Cycle

Concerning your organization, do you know the length of your cycle for each of these? If you add them all together, you can define the full Cash Conversion Cycle for your company. Once you have done that, you have three questions:

1. What is your Cash Conversion Cycle?
2. Are you happy with it?
3. Can you improve it?
4. Where should you focus your efforts?

Regardless of which cycle you examine, there are basically three ways to improve it:

Eliminate mistakes

There are all sorts of mistakes that affect these cycles, from the obvious ones of production mistakes to rework, mistakes in estimates, contracts, invoices, and wrong delivery. We make them all. But do you know which ones are affecting your business the most? You need to honestly examine your business to identify where the mistakes are made and which are the largest. Focus on the biggest first as they will be the easiest to get the largest benefit from, e.g. if your inventory time is 120 days, but your billing and payments time is 30 days, it will be easier to cut five days off production than billing and payments.

Shorten the cycle time

Look at all the times and see where you can shorten them. While COVID has beaten up the “Just in Time” production process, you can still work at reducing production time and inventory time. What can you do on the sales cycle, the billings and payments cycle? Right now, everyone is at home dealing with COVID, so maybe it is a good time to work through these processes to see where efficiencies can be made. Consider working through Tom Wujec’s method of improving processes. It is a great way to see how improvements in your cycle time can be made.

Improve your business model

Changing the business model is an interesting one. Can you change how you do business so that you can dramatically alter your cash conversion cycle? Dell did and took its cash conversion cycle from 63 days to -39 days. Yes, that is -39 days. How? If you bought a computer from Dell, they are made to order, so you have paid for it before they start manufacturing. Thus, they have $0 receivables; they pay their suppliers probably 60 days and their employees 14 days. Since they are paid upfront, there is no delivery cycle, so the only other area is the sales cycle.

I once worked with a company that was facing bankruptcy and had to reorganize itself to survive. They looked at the Dell model and decided they need to copy it. They changed their business model and became the only company in their industry to have $0 accounts receivable. Using “Just in Time” production, they were paying their suppliers after they got paid. They did a great deal of market research and determined within a six-month period when their customers would purchase. Thus, they focused sales efforts on customers within that window, primarily reducing the sales cycle.

The hard part is changing the model because it is not an incremental improvement but a new model. Look at Costco, the first big-box retailer to introduce membership fees, providing a large part of its profit at the beginning of a relationship with the customer.

So, what can you do? Examine it; you will find it is well worth the effort.

Once you have examined your Cash Conversion Cycle, the next thing is to look at your business through the Power of One.

Power of One (1%)

Alan Miltz developed the Power of One and basically looks at the following financial variables and asks, “How would your cash flow improve if you increased any one of them by 1%?”

• Price
• Volume
• Cost of Goods Sold
• Accounts Receivable
• Accounts Payable
• Inventory
• Overhead Expense

If you undertake this analysis, you will quickly see which of these variables most influence your cash flow. Starting with them from those that affect cash flow from largest to smallest, identify what percentage you would like to improve them this year and the impact on your annual cash flow and EBIT. Then work to figure out how to realize the improvement.

Working through your Cash Conversion Cycle improvements and the Power of One, it is useful to have a business coach who helps you and facilitates the meetings.

Call me to help you figure out how to improve your cash flow from now on.

Copyright (c) 2020, Marc A. Borrelli

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