How to Improve Your Cashflow
The value of your company is going to be impacted by your cash position. The more cash you generate, the more valuable your company will be. Then, in contrast, the more working capital you need, the less cash you generate, the less valuable your business is going to be. So finding ways to increase your cash position is going to have a direct impact on the value of your company.
Now you may be saying “OK I get that, but how do I do that?”
Maybe you are in an industry where the industry standard is that everybody pays in 30 days. It’s just the way the industry works. Well, that may be the industry norm, but let me give you some ways to think about the cash that might enable you to increase your cash position.
Remember, cash flow comes down to two levers.
- It’s about increasing the cash coming in, the speed at which cash comes into your business.
- Then decelerating or slowing down the pace at which cash going out of your business.
So let’s focus first on ways that you might increase cash coming into your business, the speed and pace of that. These are not ideas that I intend for you to go implement right away. What we are doing here is trying to give you some ideas to spark your thinking. There may be one that you can apply to your company or industry. So let me give you the breadth of ideas and hopefully one resonates with you.
- Maybe you are in an industry, for example, where you ask customers to pay in 60 days. Maybe it is time to shorten that to 45 or 30 days.
- Could you be more disciplined about the way you collect receivables. Maybe you already ask your customers to pay in 30 days, but really you only call them once they are at 60 or 90 days late. Maybe it is time to get more disciplined about that.
- Could you accept credit cards for smaller payments?
- What about increasing the portion of deposits you take on a large order? If you’re asking for 25% upfront, would your customers really balk if you went to 30 or 35%?
- What about incentives for early payment?
- Or penalties for late payments?
- These are all different ways that you can think about accelerating the speed at which cash comes into your business.
The other lever you have is to slow down cash going out of your business. Here are a couple of ideas to get your mind turning on this one.
- How about negotiating longer payment terms? So let’s say for example you are paying suppliers in 30 days. Is it reasonable to assume that those suppliers will continue to supply you if you stretch them to 45 days? That 15 extra days can have a material impact on your cash position.
- Are there suppliers that you can pay on a credit card and take advantage of the 20 extra days of float you get on a credit card?
- Are there ways that you can be reducing the inventory that you carry so that you are more efficient with your cash?
- What about reducing your equipment needs? That machine that you bought last year, did you really need to buy it or is it possible you could’ve rented it only when you needed it.
- Get creative!
- Reducing your needs for capital equipment can have a material impact on your cash as well.
Once you’ve done sort of the basics of increasing the speed at which cash comes in and you are slowing cash going out, maybe it is time to get a bit more creative about cash flow.
Case Study
That is something that Harley Davidson did. You think of Harley Davidson as being this amazing brand today. But back in the early 80s, Harley Davidson was struggling. Sales were flat, cash was tight, and they were looking for a way to increase some cash coming into the business.
They realized they had this small group of very passionate riders that loved Harley Davidson and everything it stood for. So what Harley Davidson decided to do was to create the Harley Owners Group, or for short, HOG. This was designed to harness this passion that Harley owners had for riding. They published, for example, “area group rides.” If there was a group ride going out of Sacramento, CA they would publish that so anyone in that area could go with fellow Harley owners.
HOG members also got a discount on swag, like leather jackets and bags and hats and helmets, etc.
Harley created this sort of culture, but what they also did was create $45M of free cash flow coming into Harley every year because they got a million Harley owners to pay $45 a year to become a member of the Harley Owners Group. They now have $45M of free cash flow coming into the business without the typical hard costs associated with that level of sales. Usually, when Harley Davidson sells $45M of motorcycles, they have to go buy materials and all the other hard costs associated with building a motorcycle. Well with the Harley Owner’s Group, it’s almost all free cash coming into the business.
That is just one example of a company getting really creative about cash. Because again, the more cash you can get your company generating, the more valuable it will be to a buyer.