The Cash Flow Blog

At a high level there are only two ways to fix a cash flow problem – bring more money into your business or cut the amount of money leaving.  Of these two options, cutting expenses has some real limitations.  You can cut once, sometimes twice, but you can’t continue to cut expenses month-after-month – eventually you’ll cut yourself to non-existence.  There is a reason cost cutting is commonly referred to as death by a 1000s cuts.

That’s not to say businesses shouldn’t cut expenses, they should.  Prudent managers, business leaders, investors, and stakeholders expect operations to run lean.  Expense management maximizes profitability.

Expense cutting is a stopgap action that can have an immediate positive effect on cash flow, but can cause some serious problems in the future and compound a cash flow problem.  You should minimize expenses as a normal course of ongoing business and cut them judiciously in response to a cash flow crisis.  I’ll address this topic in a later post in this series.

Assuming ongoing and effective expense management, cash flow problems are best fixed with revenue increases and the escalation of account receivables.  For most people this means a sense of urgency to get more new customers.  But it shouldn’t – it should mean something much more.

Boosting revenue to address a cash flow problem is best thought of from the perspective of where new money can come from.  There are only three ways a business can increase revenue:

• Get more new customers
• Increase the value of your average sale
• Increase the rate and frequency of repeat buyers

There are countless books written on how to find new customers.  If fact, there are so many books, websites, and authorities speaking to identifying, attracting, and winning new customers that I’m not going to add much to it in this series.  Instead, I’d like to offer a different thought on wining new customers to fix a cash flow problem – viability.

While there’s no argument against the need for new customers to solve a cash flow problem, there are realities to factor into the discussion:

Root cause of cash flow problem – Are you sure your volume of new customers is the root problem of your cash flow woes?  For many companies, it isn’t.  I’ve worked with more than one company who approached me in desperate need of a lead generation campaign to boost sales only to discover the rate and volume of new business is good, but churn is unacceptably high -or- the average transaction size and margins are unnecessarily low.  A good analogy is asking for a larger pipe to pump water into a holding tank to fill it faster than the hole that’s draining it.  For many companies, a better long term solution is to plug the hole that’s draining the tank.

Time to cash – It’s one thing to make a sale, it’s another to have money available to spend.  When looking at new customers to solve a cash flow problem, be sure to factor in time for lead generation, your sales cycle, your customer’s purchase cycle, production, delivery (if applicable), accounts payable, and your customer’s payment process.

Looking at every element necessary to find a new customer, sell them something, deliver, and receive payment, you may conclude finding new customers won’t help in the time-frame you’re dealing with.
It may be best to look at new customers strictly as a long term solution to avoid future cash crunches.

Cost of sale – What is it going to cost to quickly get a new customer?  Cost in this case doesn’t mean the cost of sale built into your pricing, but the incentives you may have to offer to encourage a buyer to act quickly – discounts, 2 for 1, etc.  If your underlying cash flow problem is low margins, financial incentives aren’t a good idea.

When using financial incentives to motivate a new customer to purchase, be sure to include a reason for the offer and set a deadline to act.  Reasons may include:

• Celebration
• Anniversary
• Product or service launch
• New release of a product or service

You want to offer a reason for your incentive to protect yourself later.  For example, if you offer a discount because of an anniversary, there’s an expectation the discount will disappear after a period of time.  The deadline to act is further leverage to create urgency.

Consistency – What is special about a special that is offered every month?  Nothing. Yet this is what some companies do month after month in attempt to increase revenue.  What results is prospective customers learn your list price is artificial and there’s no urgency to act – they can get the discount any time they want it.  What happens over time is your ability to motivate new business and create a spike in revenue is diminished.

Risk- Discounting your product or service to drive new sales can be effective in creating a spike in revenue, easing a near-term cash flow problem.  But you you need to weigh the risk to future revenue.  For example, if you discount a year’s worth of service to get cash now, be sure you understand how doing so will affect future revenue and cash flow.  You don’t want to create a bigger problem in the future – reducing margins for a year and not having a customer you can effectively sell to for months – due to an incentive you offered to spike revenue.

Be sure you understand how a financial incentive affects your business months down the road before you offer one.

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Solving a cash flow problem with a strategy to get more new customers is prudent, but possibly foolish at the same time.  The prudent part is an abundant,  steady, and predictable supply of new customers is the ultimate fix to a cash flow problem.  The foolish part is if you don’t already have an abundant,  steady, and predictable supply of customers sufficient to avoid a cash flow problem, the odds are against you quickly creating that supply.  Worse, it may lead you to offer discounts, giveaways, and act in desperate ways that compound your cash flow problems.

A better strategy for many companies to fix a cash flow problem via a revenue increase is to pursue repeat business or an increase in their average transaction value.

What say you?

No matter your political persuasion, it’s hard to disagree the economy isn’t pumping along the way most business leader’s wish.

Things could be tougher, but many companies are feeling the slowdown.  In many markets, money is in short supply, purchase decisions are delayed, upgrades are  put on hold, and prospective and existing customers increasing espouse the view maintaining the status quo is the wiser of competing options.

In times like this, many businesses face falling sales, revenue shortfalls, and cash flow crunches – percentage of renewals can fall and customer churn can increase.  This is not to say the sky is falling, it’s just reality many businesses now face in many markets, especially markets driven by disposable income and earnings per share.

While current conditions are challenging, there’s a lot of potential for many of us to not only maintain, but increase profitability, as well as increase customer loyalty and the value of our customer base.  We need to resist the pressure to panic and approach current business conditions thoughtfully.  Stable cash flow is the immediate need.

Cash flow is the ability to bring money into your business at a rate meeting or exceeding your need to pay expenses.  And while cash flow is critical in all business climates, it takes on even larger importance in tough economic times – when money is in short supply, credit lines are maxed, and the cost of money is prohibitive.  Maintaining a strong cash position in your business is critical to survival.

As I was quoted in a recent Wells Fargo Small Business newsletter on best practices for streamlining cash flow, cash flow problems can damage your business several ways:

• Your expenses go up when you can’t pay bills on time, as you’re assessed late fees—”That’s a cycle that digs its own hole,” he says.
• Planning is hindered—Plans you may have for a product launch, the addition of business equipment, advertising and promotion or for anything else that might be growth-oriented can be derailed.
• Problems in your workforce—Cash flow issues can cause panic among employees. If, for example, people have questions about being able to cash their checks, they question the viability of a business, which can lead to turnover.
• Customer turnover—What if you have trouble paying suppliers and they begin to slow the pace of delivery of goods and services to you, which, in turn, causes difficulty in getting goods and services to customers? If lead times on product delivery get longer on a sustained basis, loyal customers won’t stay loyal that long.

Cash flow problems aren’t the end of the world, but it can seem like it when you’re in midst of the problem.  The truth of the matter is cash flow is a serious problem, but if you act quick – and smart – it’s a manageable problem whose cycle of havoc can be ended.

With this post, I’m opening a series of posts, articles, and events on cash flow, focusing on the six most common cash flow challenges and their associated solutions:

Common Cash Flow Challenges

• Not enough new customers
• Margins are too low
• Expenses are too high – this month, quarter, annual, etc.
• Customers don’t pay or don’t pay on time
• Customers don’t purchase more than once or don’t purchase often enough
• Customer turnover is too high

Over the coming weeks, I’ll tackle each of the challenges listed above, speak to the cash flow problems they can lead to, and identify a number of meaningful and practical things businesses can do to avoid them and fix once they’ve been identified as a problem.

With this series, I hope to provide a simple framework for dealing with cash flow issues and show you a number of ways to avoid them from occurring in the future.