Finding Cash Laying Around In Your Business

As we emerge from quarantine, I’m noticing a red thread (or perhaps I should say green thread) among companies that have demonstrated resilience and the ability to adapt, survive and even thrive, during the shutdown. That common denominator is CASH.

What role does cash play in a crisis? 

Businesses with cash reserves and optimal cash flow processes put themselves in a position to ride out most storms. When leadership teams have a “backstop” of cash on hand, it gives them time to think proactively, innovate and find the best solution. Having that breathing room lowers anxiety levels, making for faster, crisper decisions. 

On the other hand, the leadership teams that went into quarantine with poor cash positions seemed to be nearly frozen by these events. Normally cool heads swirled in a state of panic instead. Decisions were rushed and debt they were willing to carry yesterday, now appeared exponentially larger overnight.

There's an old adage out there, "revenue is vanity, profit is sanity, and CASH IS KING."  As business owners, we inherently know this to be true. It is easy to justify a poor cash position when times are good. “There is always tomorrow and the next sale” and that false sense of security leaves a company flatfooted when adversity strikes.

But what if those good times come to an abrupt stop? What if that next sale doesn’t come? So, what are some of the lessons that we learned out of this?  And what can you do going forward? 

The first lesson I want to share is that cash is the fuel required to grow your business, but it's also the backstop when bad things happen (like a global pandemic). And trust me, more bad things are going to happen. It's just life. At Compass Point, we refer to these bad things as the 5Ds of Business: Death, Disability, Divorce, Distress, Disagreement. We're in major distress right now. Probably going to be for awhile. There will be more of these five Ds in your business lifetime - external like a pandemic and internal such as a family issue. It's important to start building that cash backstop so you can weather these storms. 

Next… what should that backstop look like? I suggest you start aiming for two months of operating expenses in a separate bank account that you do not touch. That's your initial cash reserve. Once that stop gap is established, you start working towards six months of reserves, and then 12 months. Imagine the options and leverage you will have if over the next one to three years, you start building the company’s cash reserves to 12 months of operating expenses. You will sleep better.

Lastly, Let’s look for cash laying around in your business. We refer to this as the “leaks in your cash bucket”.  Where are your leaks? Here are five areas you need to look at: 

1. Cash Conversion Cycle: The first area that you want to review is cycle time. Think about the time from prospect to getting cash in the bank.  How can you reduce that cycle time to get your cash faster? How can you reduce the sales cycle? How can we reduce the order cycle? The drawing cycle, the production cycle, the delivery cycle, the invoicing cycle… see what I’m driving at?  When you reduce that cash conversion cycle, you get cash faster. 


2. Eliminate mistakes. They are costing you not only profit, but real cash. It takes cash to pay for mistakes.  It's a problem in every business and they like to hide. Some of them are obvious such as manufacturing mistakes or invoice errors. But I promise you that there are mistakes all over your business. Tell your CFO and accounting team it’s a priority to find them. It's almost always a lack of good systems and procedures. Review and fix those items and plug those holes. 

3. Business model. This may be a scary thought but have you determined if your current business model is a cash spicket or a cash suck? How could your business model produce cash for you faster? How has the pandemic changed your business model and has the team really worked on streamlined those new processes to be cash position.


Here are some ideas you might consider as it relates to your business model:

  • Create a membership program
  • Create a subscription model (aka passive recurring revenue!)
  • Ask for deposits (or bigger deposits)

  • Develop benchmark progress payments (or revisit your current ones)

Don't say "Oh, our industry doesn't do that." That line of thinking is no longer an option. If you are creating value for your customer, there will be NO push back. 

4. Inventory.  In this day and age of supply chain management software and logistics, inventory that's sitting on your floor, turning over just one or two times a year is COSTING YOU MONEY. You should be getting turns of 10, 12 or more. Talk with suppliers and build relationships that minimize your inventory investment and give you priority service when those parts are needed. Innovations are happening at breakneck speed and with more frequency – so get your supply chain in order, reduce inventory, get that cash back in the house. 

5. Accounts receivable. Some companies may be experiencing lagging receivables for the first time. Others are seeing their terms stretched out for months. Extended receivables will be even more common in the coming 12 to 18 months as the economy figures out how to recover.  This is not happening solely because of recent events. In fact, it’s nothing new for customers to use their vendors as a bank, so be prepared. Those outstanding balances are going to get larger if you don't manage them.  Old money is going to be harder than ever to collect. What's old money? One day after it's due.  Stay on top of accounts receivable like a hawk. 

My Receivables Tip... Whenever possible, encourage your A/R manager to build good relationships with their A/P counterpart at your b2b customers. This camaraderie could help expedite payments or at the very least help get clarity on what is causing the delay.

Cash remains king, especially in a crisis.  Don’t wait for ‘someday’ to start building cash reserves. Find those leaks in your cash bucket and start plugging them today.  Regardless of your industry, you need to have cash reserves, because times will change - guaranteed.

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