Cash is King! You have probably heard this saying and regardless of what you think it means we all know that it is hard to conduct business if you don't have any cash. Right?
Most accountants would probably say that if you want to increase cash on hand, you either need to increase revenue and or reduce expenses. I agree with that, but I'd also like to add another way and that is to Close Your Cash Gap.
What is a cash gap?
It's the timing between your account payables vs your receivables and the revenue that it represents.
Let's say you were a contractor and you spent $1,000 cash for supplies and charge your customer $4,000 with 50% due after completion and the balance due in 30 days. Assuming it took you 30 days to complete the project, you would have a cash gap of 30 days totaling ($1,000). The contractor in this example must have enough cash in the bank to cover the $1k plus any other bills due during this time.
To close the gap we will look at two areas, accounts payable and accounts receivable. Both of these numbers should be found on your balance sheet.
I was consulting with a small business that was struggling with a cash shortage. When I looked at the expenditures and bank statements we discovered several services that the company was not using (almost $2k/mo) so we immediately discontinued those automatic withdrawals. Next we looked at the terms of each remaining vendor and picked the top 3 to contact and see if payments could be moved out by 30 days. The next step was to apply for a business credit card. When the supply invoice was due the payment could be made via the credit card extending the actual cash disbursement another 30 days.
Another organization had burned through their reserve and was starting to panic over a lack of cash. I asked to see their accounts receivables and found that they had over $75,000. Then we looked at when they were due and I found a couple of interesting problems. First, $25k had already been received but had not been accounted for. That brought their total to $50k. Of the remaining balance almost all of it was past due by over 90 days! What we did was to list the customers and contact them to find out when they planned to pay. If they never received an invoice, we invoiced them for the balance due. We negotiated a payment plan and updated the terms moving forward so that payment in full was received at the point of completion.
Going back to the original example of our contractor let's apply the changes to see how that will affect the companies cash position.
By negotiating better vendor terms he is able to order the $1k in supplies without paying upfront. The new customer contract requires 50% upfront with the balance due upon completion. By making these changes cash goes from minus $1,000 to $4,000. See the chart below.
If you play the scenarios out over 3 months assuming 1 job per month, the cash on hand for scenario 1 grows to $3,000 compared to $11,000 for scenario 2! Let's take a closer look.
Now for the new terms and condition for scenario #2. Look at the difference!
So why is this important? After all, we are just changing the timing of payments and expenses, right?
While it is true that the profit $9,000 for both scenarios will be the same, the organization in scenario 2 has less risk and more cash which potentially provides better flexibility when evaluating other business opportunities.
In real life the numbers can become significantly larger and things like compensation & benefits create additional complexities in evaluating the cash gap. Making errors on cash flow, whether in a large or small scale operation can lead to stress or even bankruptcy.
Each organization has its own cash requirements in order to operate efficiently. A once a year cash gap analysis is one way to identify opportunities to increase your cash position.
An annual cash gap analysis includes:
1. Evaluate all expenditures from high to low concentrating on the top 80%.
2. Eliminate redundancies or non value add expenses.
3. Review contracts and identify potential changes to terms and conditions
4. Negotiate new T&C's or find alternatives - buying coop, memberships, etc.
5. Evaluate all past due invoices
6. Collect outstanding balances.
7. Review customer/client contacts - terms - conditions
8. Negotiate new T&C's
If you have questions about conducting a cash gap analysis, feel free to schedule a chat.
In 2002 Colorado had a devastating drought.
In fact, according to one Hydrologist it was the worst drought in Colorado history. While presenting at a river outfitters conference he explained that Colorado always has a drought somewhere in the state. He contrasted that by showing us a chart of 2002 where every single region within the state experienced drought at the same time. This created the conditions for fires to burn uncontrollably throughout the state to the extent that the Governor went on the air to tell the nation "don't come to Colorado this summer our state is on fire!"
As you can imagine this really hurt the normally robust tourism experienced during the summer. Because of a low to non-existent snow pack, streams were drying up and even the Arkansas River which usually receives supplemental releases from dams upstream, crept along at what would usually be winter flows (barely enough to raft on). Most rafting companies experienced anywhere from a 30-70 percent decrease in business that year with one notable exception!
I had to meet with the owner to find out why when everyone else was going out of business, he had actually remained steady and took over the number 1 slot in market share. So I set up a meeting and interviewed him.
Here is what I found out.
1. Raving fans - The experience that they created was unique and even with low water they made it fun and adventurous. This resulted in guests that were super excited and naturally spread the word to family and friends.
2. Key Customers - They had developed strong relationships over the years with key group leaders. Their emphasis was on the 10% of the people that accounted for 90% of their business.
3. Multiple Income Streams - Instead of relying on raft trip income exclusively, they developed a number of other sources of revenue. This included onsite camping, food service, hiking, climbing, etc. By offering a variety of choices they were less dependent on a single source of revenue.
4. Advanced Commitments - This was probably the most significant take away. 80% of their business was booked 1 year in advance. Brilliant! Instead of waiting and then spending hours sending emails, postcards, calling, etc. They communicated in advance that if they wanted to guarantee a spot for next year the group leader needed to come prepared with a deposit for the next year. This virtually eliminated the issue of fair weather rafters and provided a really solid base for planning. If a group did not renew, they had time to fill it from their database. In this way they always knew in advance how the year would go and it helped them optimize their schedule and staffing.
I hope these ideas stimulate your thinking on how you can drought proof your organization. It certainly did for me. I have actually used what I learned here to begin developing what I am calling a revenue factory. But, I'll need to share more details with you in another article.
If revenue in your organization is not where you would like it to be, I'd be happy to chat with you about ways to improve your position. Feel free to reach out at email@example.com.
Millennials and Generation Z don't want bosses --- they want coaches
According to research conducted by Gallup, managers play the single most important role in determining staff engagement and overall productivity. Currently only 34% of employees are engaged at work. Gallup defines an engaged employee as involved, enthusiastic, and committed to their team and organization.
What I find incredible is that after decades of research, Gallup shows the following results comparing engaged team members vs disengaged team members.
Engaged Team Members
With these staggering differences I would think getting to high team engagement would be a top leadership priority within every organization!
Unfortunately even those that want to improve, find it difficult to make the changes necessary. How do you develop managers who can become great coaches?
I remember my first promotion to a management position. I was working in a warehouse and my boss called me into his office. "Wear these" he said as I reached out to accept a button up shirt and tie. I didn't ask any questions, I just realized that I was moving out of jeans and t-shirt mode into the suit and tie. I was razzed by my staff for a week but it was clear that I was making a change from being "one of the guys" to becoming a leader and future coach.
My boss had many meetings with me throughout that first year talking about purpose, goals, measurements, personal development and much more. In fact, it was because of the example he set and what I learned in those formative years as a manager that I was able to develop my own high performance team and replicate that many times over in the years that followed.
While Gallup did conduct research in those days it wasn't until several years later that they published a number of books the most recent being "It's The Manager" in 2019.
What I realize now is that my boss was actually more of a mentor and coach than anything else. The research validates the methods that he used. I was fortunate to have someone that intuitively knew how to engage his staff.
Not everyone is that lucky.
With more individual and team contributors getting promoted into management positions it is critical to include in that transition good training and coaching on how to become an effective manager. How to lead well and how to coach.
This is where business coaching or executive coaching can make a huge difference.
Often times senior leaders don't have the time to invest in the weekly development of their Jr. or even mid management team. Many times small business owners have not had the opportunity to get coached themselves let alone do it with their team.
That is one of the reasons I started Forward One Business Coaching. To come along side leaders who are committed to making the changes necessary to improve their organizations and have a positive impact on the world.
Here are a few action steps:
I believe your investment will be worth every penny.
Let me know how it goes!
If you want to chat I'd be delighted. You can schedule that directly here.
Dwight Grant is a seasoned businessman with over 30 years of leadership experience. He lives in CO where he enjoys whitewater rafting, mountain biking and spending time with family.