Issue link: https://read.dmtmag.com/i/708576
AUGUST 2016 20 THE JOURNAL The Production Cycle Approach to Healthy Cash Flow BY SCOTT STROUD MARKETING CONSULTANT Picture this: your phones are ringing, your orders are piling up, your people are working at full capacity, and your P&L shows a nice, healthy profit. Good times, right? Except there's a problem: you don't have enough cash to cover payroll… which means it's all going to come grinding to a halt. There's no better illustration of the profit "il- lusion" than that. You see, profit is a theoret- ical number, because it includes the value of your accounts receivable. And when's the last time you went to the store and spent an ac- counts receivable? Cash flow is critical to maintain your opera- tions, but it's even more important for growing your business. You need capital to invest in the resources that will make the future checks come in. Many business owners already know this. And so, to improve their cash flow situation, they look to trim their costs. But while effi- ciency and productivity are indeed important, they can't solve cash crunches on their own. For this, you need to focus on your complete busi- ness funnel. Start with your production cycle: balance incomes and outflows We teach our clients to solve cash flow issues by analyzing their production cycle and creating a chart to compare the points where money goes out to the points where money comes in. To do this, you begin by breaking your pro- duction cycle into six activity hubs: 1) Acquiring the lead 2) Transforming lead into client 3) Completing the sale 4) Producing the product/service 5) Delivery/distribution 6) Service and follow-up. Every business is different, but there are very few production cycles that don't fit this format. The next step is to go through each activity hub and identify your expenditures of time, en- ergy, and money (as a business owner, you should be accounting for all three!). This ranges from time spent writing proposals to money spent buying raw materials or paying for hourly labor. This will tell you how much you spend during each of the six activity hubs. Once you know where your cash is flowing out, write down where your cash is flowing in. Again, every business is different, but we gen- erally see something like this: See the problem here? By the end of the job, you've incurred 90% of your costs but only 50% of your revenue. And you've probably got to wait another 30 or 60 days beyond the completion of your follow-up activities to receive that last check. If your table shows a similar pattern, then your revenue cycle is not strategically aligned with your production cycle. To fix this problem, you should create mul- tiple payment milestones earlier in your produc- tion cycle. That's because, as a general rule, your cash flow is much healthier when you col- lect many small payments or draws from your clients instead of a few big ones. Many lenders understand the need to keep cash flow consistent, and so offer flexible terms, including curbside funding, or even paying draws based on production, paying upon load- ing or when the materials leave the factory. The point is that getting paid earlier and more fre- quently, even though the overall collection amounts are the same, can give you much healthier and more fluid cash flow. (And if your client pushes back on that structure, that could be another red flag. Be- cause that might be the kind of client who will sit on your final check for months after the job is complete.) Focus on your complete business funnel As you structure your revenues to anticipate costs instead of trailing them, you'll notice something else happening: your relationship with your clients will change.