When I started a drywall company many years ago, we could issue an invoice in ten minutes…because we had to in order to survive and grow. Profits didn’t matter; that’s an accounting concept that only exists on paper. The only thing that mattered to our start up business was cash flow. And its metric was speed!
We even opened our bank account at the same back as our largest customer so that we didn’t have to wait for the cheques to clear financial institutions. We knew our “Total Days to Cash” metric…in minutes!!
Cash flow is the fuel for your business, regardless of size or age. You pay your employees every two weeks, or, ideally, twice per month (and avoid two months with three payrolls). You pay your suppliers every month and perhaps more often. Your customers pay you every month, and hopefully much more frequently.
Universal Truth: The faster that you can generate cash, the faster that you can grow your business.
Monetization defined: Monetization is the conversion of your employees’ time and skill, your expertise, and your business processes into value for your customer which is then converted into cash.
The metric is “Total Days to Cash” which measures how long it takes to convert your inputs into cold, hard cash.
Your Total Days to Cash number is likely much higher than you think!
Tips and questions to optimize your monetization:
- TOTALS DAYS TO CASH: measure your labor inputs which you pay every two weeks, material and overhead inputs which are likely paid in 30 day cycles as incurred, and then add the time it takes to store, sell, ship, install, test, certify, invoice, wait, and finally get paid. That’s your Total Days to Cash.
- CASH FLOW: Cash flow comes from Volume of Sales X Profit Margin X Velocity. Sales and margins are topics for another day. Although, margins are the secret weapon to cumulating surplus cash (once you finally get paid). It worked for Apple, and it can work for you.
- VELOCITY: This is where most companies can dramatically improve their cash flow. Factors include labor efficiency, invoicing speed, and payment terms.
- LABOR EFFICIENCY: How billable or productive is your entire labor force? The higher their efficiency, the more cash they can generate. Think of this like traction in your car. My car has winter tires and all-wheel-drive so I have lots of traction. You can measure efficiency as cash flow per employee.
- INVOICING SPEED: How quickly can you issue an invoice once the work is completed? Do you waste time chasing paperwork and customer approvals? This is the value of daily time sheets because you can issue an invoice every day once the work is done. Your management information system needs to be very good at tracking operations daily (yes, daily!) in order to maximize invoicing speed.
- PAYMENT TERMS: As big companies attempt to maximize their financial performance by squeezing their suppliers (that’s you), they are forcing their suppliers to accept longer payment terms, such as 90 or 120-day payment terms. Always negotiate aggressively with your big customers for favorable payment terms such as weekly invoicing, progress invoicing, and, if needed, discounts for prompt payment. Many large companies must accept prompt payment discounts if offered. So, offer them!
- LEVERAGE: Make sure your financing is properly structured for your business. Even if your bank will finance receivables, they will typically only lend against 75% of the receivables balances. Make sure you negotiate proactively with your bank for more financing, especially if you have AAA customers like publicly traded companies or governments. And, don’t use current operating cash to fund long term assets. The source of cash should always match the asset life. Therefore, use long term debt or leasing for acquiring long term assets (even if you have the cash).
- FLASH REPORTS: The cash metrics above are some of the most powerful metrics in your business and they’re not on your financial statements. They should be on your Flash Reports!
Monetization is about realizing that everything you do initially consumes cash and eventually creates cash. Your job is to shorten the distance and time between consumption and creation.
How can you use efficiency, speed, payment terms, and other factors to improve your monetization?
Next week, we’ll continue on to the fifth M: Management, and how everything you do can create value for your customers, employees, and shareholders.
If you’d like to discuss how I can help you to improve your total days to cash, please call me at 1-306-992-6177 or send me an email at [email protected].
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