The Cash Flow Blog

In an earlier post I mention time to cash several times and time to revenue others. The reason is because the two are related, but not the same.

Revenue is greatly based on accounting policy. When revenue can be recognized is a critical element of finance. Sales people enjoy it too as it’s generally when they’re paid a commission (booking commissions aside).

Revenue recognition policies are important to sales people and executives because of its tie to commission, quota, and financial reporting. Clearing all hurdles to revenue is something everyone in the sales organization should understand and work to accomplish as fast as possible.

Cash is…well cash. When you have money in hand and available to spend, you have cash. This can happen well after revenue has been recognized. You can’t pay bills, employees, rent, and utilities with revenue. It takes cash.

Yes, a line of credit can pay bills and some companies can factor receivables. But eventually you have to settle accounts. That’s the point of cash flow – timely money in, timely money out.

You should be tracking both.

I’ve been thinking today about cash flow.  More specific, the elements of cash flow and the timing of revenue and expense. As I use to write The Cash Flow Blog for AllBusiness.com, I think of cash flow occasionally – at least once a month

The cash flow work I did with Guardian Medical Group, has stuck in my mind. I really enjoyed the work I did with Guardian. The secret to our success was the speed at which they implemented suggestions. Their execution was stellar.

We had calls each Tuesday at 11AM Pacific. The calls lasted about an hour, sometimes longer, sometimes shorter, it depended on what we were discussing and how soon we nailed-down an action. Recommendations made in those calls were without fail implemented by our next conversation.

A lesson from that experience is great ideas and action plans are worthless without execution. Taking action is the key to success.

Back to what I was thinking about this morning – a critical element of cash flow is the timing and availability of cash. It was this particular aspect of cash flow I focused on with Guardian.

Guardian’s challenge wasn’t making money or managing expenses.  Their challenge was receiving and having access to money in the time necessary to offset expenses. Their cash flow woes led to financed operations and artificial limits to future business plans.

The reason I jumped on Guardian’s accounts receivable was because it was so large. Making a few changes to their billing practice and process promised to bring money into the business faster, solving their cash flow problem. It worked incredibly fast – measurable results occurred within one billing cycle.

Time to cash is the key to the revenue piece of the cash flow equation. You have to make the sale and collect money before you can pay expenses and service debt. For companies with a small or nonexistent cash reserve, this is a harrowing reality.

When I think of time to cash, a number of things cross my mind:

• lead generation
• sales cycle
• invoicing
• customer payment cycle
• access to cash after receipt

When you forecast cash, all of these things must be considered. If you need money in 30, 60 or 90 days, you have to understand where you are in each opportunity and how long it typically takes to get from you are to cash you can spend.

This is why having ongoing marketing and lead generation campaigns are so important. You don’t want to find yourself in the position of needing cash and have to factor lead generation into your plan. You should always have a healthy pipeline of leads. Likewise, you don’t want to procrastinate or unnecessarily delay invoicing and receiving payments.

Depending on the quality of the receivable, factoring is an option for some companies.

Beyond the obvious, revenue has an interesting role in cash flow.

Not all revenue is alike. Margins and time are the big differences. Revenue associated with lesser expense is more valuable relative to cash flow, as is revenue that occurs faster. Of the three ways to create revenue -  new customers, increased transaction value, and repeat business – repeat business is most closely associated with higher margins and time to cash.

If there’s something to take from this post, it’s likely this – you need to keep your focus on cash flow in your business. The time to worry about cash isn’t when you need it. By that time your options are few and often come with consequences. Here are some broad things to keep in mind:

• Always have lead generation campaigns underway
• Offer multiple payment options – check, bank transfer, debit and credit cards, etc.
• Make it clear when payment(s) are due
• Don’t cloud payment terms and conditions
• Send invoices on a routine – no procrastination
• Communicate early with a customer who hasn’t paid
• Don’t overestimate the speed at which invoices will be paid and money will be available
• Maximize the revenue potential of every sale and every customer

Is there anything you’d add to my list?

There are countless ways a businesses can spend several hundred dollars a month:

• A couple nights travel
• Offsite meeting
• Customer entertainment
• All-hands meeting
• Catered lunch
• …the list goes on

- Or-

You could spend several hundred dollars cutting your accounts receivable about 56%.

Here is how one company did the latter.

Here is how we can work together.

The impact of Danzey’s collection effort has been nothing short of miraculous. As of mid-July, 96 percent of patients paid their bills within 30 days of receiving their first billing statement. Only two percent were in the 31 to 60 day range, and 2 percent were 61 or more days past due.

More importantly, Danzey slashed total accounts receivable by more than half in just five months, from $790,000 in late March to less than $350,000 by late August. “As a result of our financial controls in place, we have leveled the peaks and valleys of our cash flow, thereby ensuring that our bills are paid in a timely manner, getting completely away from financing our debt with credit cards,” Danzey wrote in his AllBusiness.com blog.

Guardian’s success has been so dramatic, in fact, that Danzey is exploring the possibility of doing contract billing work for other physician practices to produce another revenue stream.