Joint | Ceo2Ceos.com

Situation: A CEO wants to fund future growth through better management of cash flow. Cash flow has been positive for several years, and the company uses a bank line to fund receivables. How to you manage cash flow to fund growth?

Advice from the CEOs:

Since the company is cash flow positive, go to the bank with the assistance of a connected Board member and ask for better terms on your line. This will reduce financing expense.
What are the company’s Days Sales Outstanding (DSO = accounts receivable (AR) divided by average daily revenue)? Reducing this will have an immediate positive impact on cash flow.
- Normal up-front payment is 20%. With 35% gross margins and 20% up-front, the company is funding profits through the bank line. The adjusted gross margin (GM) is the company’s Operating GM less the cost of the bank line.
- Solutions: Reduce DSO by offering a 1% discount for payment in 15 days and increase up front retainers from 20% to 50%. This takes time but is doable by working with customers.
- Some customers have seen AR slip from 30 to 45 days. Offering a 1% discount for payment in 15 days is an inexpensive way to decrease AR and increase cash flow.
What is the most immediate need?
- The company has positive cash flow, marquee accounts and proof of concept.
- What is needed is additional referenceability. Can reference accounts come from exiting marquee accounts? What would this take? Can the Board help to identify and develop additional reference accounts?
The company is resource limited in sales. At this point people are needed. How can this be done without extending current resources?
- Shift resources from other departments to sales to boost sales efforts. Another CEO did this very successfully and generated a substantial pick-up in revenue growth.
- Increase the incentive for service people to come up with new revenue opportunities. Consider teaming them with the salespeople to generate opportunities.
- Consider independent rep firms. Ask key customers who they respect among the independent rep firms.
- Develop a joint venture or strategic partnership to feed sales – a situation where this is a strong win-win for both parties.
- Leverage the Board to create opportunities. Another CEO has a Board objective of 3 new accounts per year. This comes from 10 leads/connections per year (2 per Board member). Board members who can’t produce leads are turned over.

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Situation: A company has been approached by a customer with a proposal that the two companies combine. The customer believes that the combined companies will represent a greater market presence than either presents alone. This may make it easier for the combined entity to gain business from larger customers. How do you merge two firms under one umbrella?

Advice from the CEOs:

For a company to merge with a customer is a tricky process, assuming that the company has more than one customer. The merger places the company in competition with its other customers who may respond by seeking alternate providers. If this happens it will create a short term hit to revenue. This possibility has to be modeled into merger financial forecasts.
Different companies have different cultures. This fact is often ignored in merger discussions because culture is difficult to quantify or measure objectively. However if you ask those who have been through mergers, culture conflict between merging entities is most often the reason for their failure.
It may make more sense for the company to focus on ongoing sales to the customer than to entertain a combination that would result in the current owners losing control. In declining the proposal, it is important to emphasize your interest in maintaining a healthy ongoing relationship with the customer.
If the customer offers terms that are appealing, an alternative to a merger is a limited scope joint venture as a trial project to test the viability of collaboration.
Establish with your co-owners a price at which you are willing to give up control. This will help you to refuse offers that are below this price.

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How Do You Manage Cash Flow to Fund Growth? Four Suggestions

How Do You Merge Two Firms Under One Umbrella? Five Points