Executive Education

Cash Flow Efficiency: Six Ways to Get the Biggest Payoff

By Sam Zordich
The efficiency of a company’s cash flow determines its ability to thrive or merely survive during tight times. Taking a proactive approach toward how you sell and then converting products and services into cash will carry you through the most difficult periods and favorably position your company for growth. 

To be proactive and strategic during these times of economic uncertainty, look at both the short and long-term views. The long view takes into account the type of relationship you want to have with customers and suppliers. Good relations are like gold coins during tough times. On the other hand, if you extend payments to your suppliers at your discretion or step up collection activities with customers without forewarning, any goodwill or trust you have built could be lost and you would not know until it is too late. Reactive short-term actions have a tendency to lead to a death spiral where nobody wants to cut a check to anyone else.

In the short term, before paying the bills becomes a struggle, try one of the methods suggested below. For more dramatic improvements, combine two or more. Incremental improvements at any point in the cash flow cycle, from making a sale, to cutting the invoice, to collecting the payment, to paying for inventory or services, will improve your cash flow, enhance profitability, and improve your competitive advantage.

Improve Your Sales
Nowhere than in sales is it more true that working twice as hard produces half the results. Whether your customers are buying in smaller quantities, buying less often, or prospects are taking longer to make a buying decision, sales are probably suffering.

It is easy to become panicky and think you need to pursue every sales opportunity, but that is a costly mistake. Instead, assess your active customers—their buying patterns, profitability, and relevant business details—and prioritize them into segments. Use these criteria to identify new prospects that are highly qualified. High-potential prospects move more quickly through the sales process toward a decision to buy or not.

Another tactic is to eliminate actions from your sales process that do not move discussions forward. For example, if you send a personal email and then make a follow-up call before making the first appointment, eliminate the email and just make the call. Or, if you wait a week after the first email before making the call, reduce the waiting time and call within 48 hours of the email going out. Three days in a three-month sales cycle may not seem like much, but added up, three days can become months over a year’s time and that means more prospect opportunities.

Identify the key steps in your selling process. Review your wins and analyze the actions that always precede a decision to buy. We took a medical device testing company through this process and they were surprised to find that every sale they made had one action in common—a site visit. When they introduced that step earlier in the process, their sales cycle shortened by 21 percent.

Improve Margins
To bridge the gap created by slower-moving sales, look at how you can increase the profitability of your product. Now is probably not the time to increase prices. However, if you have a profitable, lower-priced product you would like to move, increase the price on a similar product in your mix and watch the movement on the lower-priced product.  

If you have received requests from customers for specific additional services you did not previously make available, now might be the time to bundle those services with popular products to increase the perceived value of your offering. A technology consulting firm we worked with developed a three-tier bundled services arrangement with their customers. The first tier was on-call, no frills.

The second tier was an annual contract with a menu of selectable frills. The third tier was a completely outsourced maintenance arrangement. The customers selected precisely what they needed and were delighted that the company understood they did not have cookie-cutter needs. Gross margins increased as our client eliminated waste by providing targeted service contracts.

Strengthen Vendor Relations
If you have been working with a vendor or supplier for a few years, chances are they want to see you stay in business. Manufacturers and service providers know that cash flow gets tight from time to time and are frequently willing to work with their customers on interim solutions. In fact, if you have treated them well when times were good, your suppliers can turn out to be among your best allies in a downturn. Additionally, you are more likely to receive product when there are shortages because you have proven you are proactive and dependable when it was hard to be that way.

A value-added distributor of lighting products chose this route when they were caught in a cash flow crunch as a result of the slowdown in construction. They approached their manufacturers for more lenient terms and one far-sighted manufacturer agreed to extend payments in exchange for more active Midwest promotions. By working together, both the distributor and manufacturer have gained superior competitive advantage in a price-sensitive industry not known for its customer loyalty.

Change Days Payable Outstanding (DPO)
Manufacturers with large payables do not want to put their suppliers into bankruptcy. Do not make the mistake of thinking that your purchases are too small or to sporadic to be noticed. The numbers can add up.

With this in mind, consider re-negotiating volume pricing based on annual accumulated purchases from the previous year if you purchase frequently but not in large amounts. Or, look at whether buying in larger quantities will get you a discount that makes it worth carrying inventory.
 
Reduce On-hand and Slow Moving Inventory
Focusing on your inventory turns has a more lucrative impact on your cash flow than payables. This was certainly the case for an orthotics retailer who paid cash-on-delivery (COD) for finished product, and had for years. In many cases, the inventory stayed in stock for 90 days before they made a sale. Each month the company struggled to meet expenses while their working capital was tied up in inventory. Although the CEO knew inventory turns of four were too slow, he was more concerned that reducing inventory on hand would mean longer lead times which would translate into reduced sales and poor word of mouth.

The solution they arrived at was to stage their production. Rather than buy the finished product, they chose to buy only the raw goods on COD and then assemble the product on site. This reduced the amount of cash tied up in inventory by 75 percent and, by assembling the product on site, they lowered their cost of goods to increase profitability by 35 percent. 

Shorten Your Days Sales Outstanding (DSO)
Another area where you can gain improvement in your cash flow is to reduce the number of days it takes to collect the cash after you make the sale. Clearly, you do not want to squeeze your credit customers because that tactic will drive them to your competition. But you also do not want to lose sight of the fact that your business must have cash to survive. Your billing terms ultimately limit how low you can get your DSO, but here are a few tips to collect your receivables faster.

First, be clear about your credit and payment terms. Just because they are in writing, do not assume that is enough. Have your salespeople point them out at every close. Find out right up front if the buyer will be able to meet the terms or make other arrangements. This step at the beginning will save a lot of headaches down the road.

Second, unwaveringly follow your collection policy. If you require payment in 30 days, decide on a grace period before you call the customer. Do not email or write a letter. Make a friendly call to inquire on the payment and see if they are having any difficulties. Maybe you, as their vendor, can provide creative solutions to their cash flow issues. Flag the account for future transactions. You may want to change the amount or length of time you extend credit.

Third, tighten your credit policy for new customers. Now is NOT the time to change this on active customers. However, DO let your current customers know they are grandfathered in because you value their business. You can also provide discounts and early pay incentives when you cannot change your billing terms.

There are alternative financing methods that can dramatically reduce the DSO if you have hit a wall. One option is asset-based securitization which helps companies collect cash from sales more quickly than going direct to the customer. But you may prefer to pay a little through discounting direct to the customer rather than pay a little to collect from an outside party. That said, the better you manage your working capital, the less you will need this option.

If you have a service company, request deposits or make prepay arrangements. Although your customers are probably also looking to extend their payables, discounting your rates may increase the profitability of their offering enough to make it worth the tradeoff.

Conclusion 
Relationships are invaluable coins during tight times. How you treat your suppliers and customers with regard to payments will come back to either haunt or reward you. While this article introduces just a few of the short-term tactics you can implement to improve cash flow, be proactive and align those actions with your long view for the biggest payoff in competitive advantage.  

About the Author

Sam Zordich is a widely recognized entrepreneur and innovative leader who specializes in taking companies—whether small start-ups or Fortune 100—through the stages of successful growth. As CEO of Stonegate Growth Strategies, Sam’s word is informed by extensive experience in market strategy, operational leadership and revenue growth.

With over 20 years of experience as a consultant and/or operating executive in companies of different sizes at various stages of development, Sam has guided business through a wide range of growth challenges. She has facilitated breakthrough growth for mature companies, tapping into significant new areas of business and revenue streams. She has also successfully founded and grown multiple companies in a variety of different industries.

Sam is a nationally published author and featured speaker on corporate strategy and growth, leadership, customer service, sales, and competitive positioning. She holds a MBA from the University of St. Thomas and currently teaches the FastTrac® Growth Venture™ program in the Opus College of Business Executive Education and Professional Development at the University of St. Thomas.