Before jumping in, I think that Cash as a topic is inextricably linked to People – people pay you cash, you pay people cash and people spend your cash. People also are the ones that can find new ways to make and spend your cash.
Providing some focus in these two areas can really pay off in the long and short term.
Most Profitable Customers
First, I suggest that understanding – really understanding – everything you can about your most profitable customers can go a long way to generating lots of cash. If you do so, you will be able to target and recognize those attributes in your prospective customers. You will be able to carve out a very defensible market strategy where you capture the most profitable customers in your industry allowing your competitors to fight over the scraps.
Here are three examples of companies that have done this:
- Dyson – 5 times more expensive than its competitors, 24% market share and 59% profit share
- Nest – 7 times more expensive, 8% market share, 25% profit share
- Apple – 3 times more expensive, 12% market share, 70% profit share
Build the Best Team
Second, look internally to your team – how you hire them, how you train them, how you pay them, how you treat them. This oft-overlooked focus can have a tremendous impact on their financial contribution to the business.
Here are a few examples in this area:
- The Container Store – New hires are interviewed an average of 9 times, hire only top 3% of applicants, 260 hours of sales training in the first year, 2 times industry pay average, 3 times industry average in revenue per employee
- Costco – (as compared to Walmart) 2.5 times the hourly pay rate, 3 times the revenue per employee, 50% less turnover
- Goldman Sachs – (as compared to Morgan Stanley) 50% fewer employees, almost 5 times the profit/employee generating $5B more in profits
The topic at hand – Cash
Thank you for indulging me the aforementioned as a precursor to the topic at hand.
There are many reasons why companies run out of cash. Here are some of the usual ways:
- Slow or non-paying customers
- Short Accounts Payable with suppliers
- Unexpected increase in Cost of Goods Sold
- Long or lengthening sales cycles
- Tight credit
- Business Cycle Seasonality
- Poor Balance Sheet Management
- Unforeseen changes in the business climate
Are you experiencing any of these in your business?
This last one is the toughest as it always happens but we never plan for it. We too often assume that the current business climate will continue. I recommend to my clients that they have at least 2 months and, even better, to have 6+ months of core capital achievement (that is, enough money in the bank to cover expenses) for the eventual and unexpected change your business will have to survive.
I believe that one of the main reasons that businesses run out of cash is that they do not manage their growth deliberately. They sometimes think that because they are growing so rapidly that everything must be going great. Not always.
There is an oft-told story of Dell from the early 90s, where they were growing so fast that they were running out of money. They were getting paid by their customers well after they had to pay their suppliers. The more they sold, they faster they were going broke. It is sometimes called “growing broke” and not so uncommon as you may think.
Dell turned it around by changing their business model. They began building custom orders online and were paid upfront before they even started the work. They also slowed payment to their suppliers and went from a cash conversion cycle of plus 63 to minus 39.
This means that they were making a dollar 39 days before they had to invest that same dollar in the business to generate that same dollar. It sounds sort of like time travel.
Per the above sentence and to reiterate this important concept, cash conversion cycle equates simply to the amount of time it takes you to get back a dollar that you invest in the business. In 1991, it took Dell 63 days to see that dollar again. Slightly over 10 years later, they changed that to -39. They were in essence printing money which, I would argue, allowed them to go private and buy some pretty big companies along the way.
Try it yourself
There is a great tool from Gazelles that help you to think through your cash conversion cycle and come up with simple ways to accelerate it.
You can certainly run through the tool yourself. If you do so, I recommend that you do it as a cross-functional team, avoid group-think and discuss the different ideas as a group afterward. I also recommend that you pick the top 1 or 2 and give them a try. These should be the ones that are a combination of the greatest impact and the easiest to implement. This will help you to get some traction and momentum for when you revisit some of the others.
There are several other Gazelles tools such as Profitability Analysis, Labor Efficiency Ratio and Power of One that can also help you generate cash more quickly. Unfortunately, these are not public tools and can only be facilitated by a Certified Gazelles Coach. I would get in trouble if I shared them publicly.
Final post in series
This is the final in the series of Startup to Scaleup. It was never intended to be comprehensive but I hope you were able to find something useful among the many posts. Here is a heartening quote from one of my readers that encourages me to keep finding interesting and useful topics to write about. Thanks to (you know who you are)!
“….. I love the stuff you put out in general. We need more stuff like yours on LinkedIn. People are so willing (my company included) to put out stuff in the name of “social media” statistics, so it’s nice when it’s actually succinct and helpful instead of making some generic point that I cannot do much with. Your stuff hits home with me as we are struggling with our own “start up” (new vertical market) and trying to ask ourselves all the hard questions. I say, “keep up the good work”.”
Links to all posts in the series (How to go from Startup to Scaleup)
Here they are in order (not including today’s):
- 5 QUICK STEPS TO TAKE BEFORE YOU LAUNCH YOUR STARTUP (#1 IN A SERIES – 5 MIN. READ)
- IDENTIFY AND NAIL THE PAIN (#2 IN A SERIES – 3 MIN READ)
- HOW WELL DO YOU KNOW YOUR CUSTOMER? (#3 IN A SERIES – 4 MIN READ)
- STEVE JOBS’ CUSTOMER TELEPATHY – HOW TO GET IT – (#4 IN A SERIES – ~3 MIN READ)
- CRIMEREPORTS – A PROTOTYPING CASE STUDY (#5 IN A SERIES – 3 MIN READ)
- 3 SIMPLE WAYS TO GET YOUR BUSINESS MODEL RIGHT. (#6 IN A SERIES – 3 MIN READ)
- 4 DECISIONS TO GET RIGHT FOR SCALE-UPS (#7 IN A SERIES – 3 MIN READ)
- WOULD YOU ENTHUSIASTICALLY REHIRE ALL STAKEHOLDERS IN YOUR BUSINESS? (#8 IN A SERIES – 5 MIN READ)
- COMPETING WITH LUCK – 4 STEPS TO A GREAT STRATEGY (#9 IN A SERIES – 5+ MIN READ)
- EXECUTION -> DESTINATION, CALCULATION, AND CONVERSATION (#10 IN A SERIES – 4 MINUTE READ)
Enjoy! Here is to a cash-rich year!
Thanks for reading!
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