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.