Are Industry Norms Hurting Cash Flow?

poor cash flow hurts businessesIs it possible your company is creating cash flow problems because you follow norms promoted by your professional, technical or scientific services industry? And do you sometimes think you should do things differently, but are afraid to do them–well, because “everyone does it this way?” Do you create negative cash flow by:

  • Offering discounts right at the start
  • Folding under the pressure of ultimatums (“We’ll take our business to your competitor”)
  • Delaying receivables which causes you to have to pay your expenses before you receive their payments
  • Postponing billing until after the work is delivered, as required by hourly billing

A whopping 82% of businesses that failed cited cash flow problems as a factor in their failure. Even worse was that they knew cash flow was a problem but they did nothing to fix it while they could have.

You do not want to be like a medical device manufacturer we know. They got deep into debt because they did not manage their cash flow at all. They had to pay for raw materials upon receipt, but they allowed their own customers to pay 30 days after delivery. With a 30-day manufacturing window, their cash flow was seriously negative all the time. They used debt to provide cash and never could get out of debt. The damage wasn’t immediate but after 30 years, they had no choice but to sell their equipment for a fraction it’s value and close the business. The owners were left without a thing.

The reality of the current (and future) Covid-19 world is that cash is under more pressure than ever. As the company owner and chief executive, you have to show leadership: no sale is worth it if it puts cash flow in jeopardy.

Fix Cash Flow Before You’re Left with Nothing

Cash flow problems begin with the company mindset. Is your company in business to sell products and services? If you say “yes” you’re likely to be selling from a disadvantage. There’s tons of competition (4,207,592 firms is a recent count)! You position your company’s offerings in contrast to the competition. You invest in branding to differentiate your company’s products and services from the competition. When a buyer challenges you to meet or do better than the competition, you comply.

On the other hand, if your mindset is that your company is in business to provide exceptional value to buyers you have taken a huge step towards improving your cash flow. Why? Because no other company can provide the same value that your company does. When this truth is firmly entrenched throughout the company, you are positioned to create equitable cash flow.

Equitable cash flow means that both the seller and the buyer are well-served by the terms of the purchase agreement.

Examples that create equitable cash flow

  • Services are provided for a fixed fee commensurate with the value received. Payment can be up front in full, or part up front and the rest divided into two or three payments.
  • Payments for raw materials are made upon signing the purchase agreement. The remainder of the purchase price can be divided into two or three payments.
  • For situations where third parties may affect the ability of the seller to move the work forward at their own pace (litigation is such a situation; building plans that require input from other professionals or from permitting agencies is another) the seller should separate the work into fixed fee portions and variable fee portions. The buyer should be expected to pay the fixed fee portions in two or three payments. Payments for the variable portions should be billed as soon as the third party’s work is completed.

Is securing your company’s cash flow urgent? Only if you want to grow your business. Cash flow increases the money you have:

  • Money you can use to grow revenue and profits.
  • Money you can use to make running your business easier and more efficient.
  • Money you can use to develop new products and services of higher value for your best buyers.
  • Money that will increase the value of your company and your personal wealth.

If securing cash flow is urgent to you, schedule your complimentary discovery call. We’ll give you several quick tips and explore options for a working relationship that’s customized to your unique needs. In fact, if you check out Money Matters and click on one of the I’m Interested buttons you’ll get a certificate for $200 off one service you book in the next 90 days. We’re looking forward to talking to you!

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