HERE ARE SOME COMMON CASH
FLOW PROBLEMS AND THE
UNDERLYING THEMES WE FOUND
WHEN WE DUG INTO THESE
PROBLEMS:
Deteriorating Accounts Receivable
A recent client had an increase in accounts
receivable of 83 days—from 36 days the
previous year to 119 days this year. At
$60,000 per day, cash was almost $5 million
tighter than the previous year. Why? When
we dug into this, we found a list of problems:
invoices had been incorrect and rejected
by the client (Execution issues); there had
been turnover in this department and they’d
lost track of their invoicing (culture and
leadership problems); and some of their
invoices were in dispute and the accounts
receivable department needed help from
leadership to reach an agreement with the
client (which points to Strategy problems).
We solved the problem by putting a team
together that, armed with the motivation that
every day of improvement meant $60,000
more cash, quickly resolved these issues.
Paying Too Quickly
I once had a client who paid their bills 21
days faster in the recent year than in the
previous year. At $29,000 per day, this had
drained their cash balance to the tune of
around $600,000. When I showed the team
this fact and asked why this was, the owner
rather sheepishly admitted he was trying
to save money, so he’d taken over leading
the accounting department. He also made
his receptionist (untrained) responsible
for paying invoices and collecting money.
Finding it much easier to pay an invoice than
collect one, the receptionist promptly paid
invoices on receipt. She had no idea of the
impact of her actions! This discussion clearly
pointed to both leadership and culture issues.
Mismanaging Inventory
To the average employee, increasing
inventory makes sense with reasoning like
“We might sell that some day,” “Our supplier
doesn’t want it back,” or “We made a mistake
and can’t charge it to the project.” However,
inventory is cash that you can’t spend. It’s
dead money. When it’s hard goods, it must
be stored, kept in working order, and used
before becoming obsolete. Increasing
inventory can be a symptom of poor stock
control and management practices, poor
internal discipline, and lack of financial
controls. A meeting with the team to dig into
what’s going on is usually enough to uncover
the root of the problem.
Inability To Raise Prices.
If you could raise your prices, you would
(obviously) improve both your profit and your
cash flow. However, I always get push back
on this one from leadership who are quick to
point out how competitive their market is. I get
it and I lived it, but I don’t buy the argument.
The first 20+ years of my career involved
competitive bidding to nitpicky engineers
with spreadsheets who were trying to get all
bids “apples to apples.” I learned, though,
that buyers don’t buy on price alone and will
pay a premium price to receive what they
feel is better value for them.
Your ability to deserve this premium is a
result of your strategy. Are you delivering
value on the things that matter most to your
core customer, or are you wasting money
doing things that don’t matter to them?
Every product or service has a long list of
attributes—the things buyers consider when
they’re purchasing. If you’re clear about how
you can win versus your competition, then
the most important of those attributes will be
the ones you do better than your competition.
For example, the client mentioned at the
beginning of this article realized they were
priced 10 percent below the market on their
core service—and they were the experts in
that field! Clarifying their value proposition
and raising their prices was their first step in
solving their cash flow problem.
Reducing Overheads And Cost Of
Goods Sold
What does it mean when your overhead
costs as a percentage of sales are
increasing? There could be several causes,
but a common subtle cause is poor people
practices: excess turnover (the actual cost
of turnover has been measured at 4X salary
for supervisors and key technical people to
more than 15X for executives), unproductive
employees (an A player is 2X–3X more
productive than a C player), untrained
employees, etc. If you spot this trend in
your cash flow story, you should take a hard
look at y our people practices as that’s likely
where your problems lie.
In conclusion, your cash flow story offers
both quick-win opportunities and clues to
understand the underlying themes in your
business. Training your people on your cash
flow story improves their understanding of
your business, enables ownership thinking
and improves their value to you. u
Richard (Rick) Holbrook is a Trainer and Certified Coach
with Gravitas Impact Premium Coaches. He works with
CEOs to help them create an executable growth strategy
that everyone in their company understands and is
aligned with. Rick has coached and trained more than 80
companies in Western Canada since leaving the corporate
world in 2004.
LEARN MORE AT:
GROWTHSTRATAGEMS.COM
403-255-3613
FALL 2018
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