Business Cash Crisis? Push your Cash Conversion Cycle

It’s OK, at some point, every business owner feels it. 

It starts with a tightening of the chest. Then there’s the ache in the pit of your stomach. And a fuzzy feeling in your head.Why? It’s almost payday and you’re short on cash.

First, breathe.  

Stressing out won’t put cash in the bank. Now, when you can see clearly, let’s get started fixing the problem:  Ask yourself this one simple question.

Where is the cash right now?

To get the cash, you have to know where it is now.  I’m betting its in one of the following three places:

  1. Too much inventory
  2. Old customer invoices
  3. A large order that isn’t ready yet

Maybe you have cash in several or all of these places.  Great!  Getting the cash into your bank is as easy as pushing your “cash cycle“.

What? How do I “Push my cash cycle”?

Every business has a cash cycle:  We buy inventory from vendors; Send invoices to customer; Collect cash from customers…. and then starts buying more inventory again.  Wash, rinse and repeat.

The trick is to make the cycle turn as fast as possible…To minimize the cash that gets “stuck” in places like inventory and invoices.   The faster the cycle spins, the faster you can begin to accumulate profits.

To “Push” the cycle, you’ll have to take personal responsibility for a few things:

  1. Call your delinquent customers.  Then call the ones that are NOT delinquent. Don’t get angry, just tell them that you would like to “schedule their payment”. Tell customers that you’re offering a 2% discount for prompt payment this month. Or a free gift. Or $10 off their next order. Use this as an opportunity to bond with your customers, not to scold them!
  2. While you are on the phone with customers, tell them you have some excess inventory and are “blowing out some over-stocks”. If you’ve got excess inventory, now’s a good time to whittle that down and turn it into some quick cash. Resolve not to buy more inventory than you need.
  3. If its a large order that’s got you down, try a variation on #1… call the new customer and offer a discount or gift for a partial PRE-payment. Nobody wants to pay 100% up front, but asking for 30% or even 50% is reasonable in most businesses.  Be frank.  Tell the customer that you’d like to do a great job for him/her… and have plenty of _____(staff / equipment / inventory / parts) on hand for their important job.  Explain that this large job makes them an important customer, and you appreciate their business.  Don’t say “times are tough” or “cash is tight”.  No body wants to save your skin.  But they do want great service and a good working relationship with their vendors (that’s you).

What if none of this applies to you?  If you do not have overdue AR or lots of inventory, visit some of my other blog posts to learn what it takes to get a bank loan (or find some hidden wealth).  And finally, take a hard look at the problem… what can you do to avoid this situation next time?  Read my book to find some of the key ratios you should be watching to avoid a cash flow crunch.

David Worrell

Dedicated to your (Cash) profits,

PS: If you’d like to learn more about the Cash Cycle in YOUR business, it’s easy.  Contact me directly! I’m here to help.  No question is too big or too small. 




Originally Published

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