Do you know how long it takes from when you spend a dollar to when you actually return a dollar back into your business? That measurement is your company’s cash conversion cycle. Did you realize that you can deliberately alter the course of that cycle?
Every day you and your employees make decisions, impact processes, develop policies, and influence people in ways that affect this cycle. Once you have mastered your understanding of how your cash conversion cycle works, you can reduce or eliminate your dependence on external financing and increase your return on capital.
You can have great profit margins and solid revenue growth, be considered excellent in your industry, and still be fast approaching insolvency. This is a serious concern for earlier-stage companies as they are most likely to be unable to obtain outside financing.
In my article “Are You Maximizing Your Business Valuation?” I referred to an owner who lost approximately $5 million — one-fourth of his sale price — when he was effectively forced to sell his business prematurely because he could not obtain external financing. His failure to manage cash carefully in the early days of his business caused banks to view him as reckless with cash, despite the fact that he had done all the right things to turn his earlier mistakes around.
When looking to find ways to improve your company’s cash position, you need to look into four key process areas:
How do you assess critical functions in your company to understand whether it is operating correctly? Do you know that every time a process doesn’t function well, or you have a wrong person filling a position, or a delivery date is missed, the likelihood of cash conversion problems grows?
For instance, the above-referenced company was very income-statement focused. They saw healthy profits on their income statement but were not realizing the cash because they employed a weak third-party collection. By putting the proper key performance indicators in place and with accountability, we learned that their third-party vendor was overcharging them by double the industry average, collection speed was well below what the owner thought, and the percentage of receivables actually collected was horrible.
If you are interested improving your business performance, let’s schedule a time to further discuss your business and how we might work together to increase your price when you exit. Contact us today for a FREE consultation or give us a call at [phone link=”true”].