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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