The first lesson that most start-ups learn is the difference between profit and cash flow. Even established businesses lose sight of cash flow when times are good, since high profits tend to generate sufficient cash. It takes tough times like these for businesses to take a good hard look at how cash is used and pumped into the business. We’ll look at how to get cash flow back on track, shaking your own money tree to find cash you already have in your business.

Cost cutting is a great way to free up cash, but it’s not the only way. If you really want to find money, you should look at the whole process from the time an order is taken to the time that cash is collected. This is called the order-to-cash (OTC) cycle.

Staple yourself to an order

When we work with clients we like to “staple” ourselves to an order to see how cash is flowing through the business. We find that when look at cash flow as a process, it makes it easier to see where cash is tied up in a business.

Below is a typical order-to-cash cycle. While this may look like it only applies to manufacturing businesses, service businesses follow along the same cycle. Their “Raw Materials” may take the form of training of employees, or pre-sale research, or hiring contractors to prepare system prototypes. Their “Build” process includes actual consulting work or services they provide. “Delivery” includes final reports, system implementations, etc.

We’ll take a look at each of these steps and give you a list of actions you can take to get your cash flowing again.

BUY RAW MATERIALS:

• Reduce inventory quantities to the lowest level possible without sacrificing service.
• Require a pre-payment or first installment to purchase materials or hire contractors.
• Renegotiate vendor contracts for discounts, smaller minimum quantities and extended payment terms. Push payment terms out as far as possible, preferably after you get paid by your customer.
• Evaluate current warehouse facility, is it being used to capacity? Consider downsizing space.

PROCESS ORDER:

• Review how many people it takes to take an order or outline project specifications
• If it is a time-intensive process to detail the order (as in service businesses), is there a way to shorten the cycle?
• Run credit checks on customers for large orders, establish and monitor credit limits
• Review order accuracy. Are proper purchase orders secured, quantities correct, and ship-to addresses verified? These can slow down the collection process in the end.

BUILD ITEM:

• Reduce the amount of finished goods inventory you need to carry
• Reduce production time, or implement more frequent installment billings as work progresses.
• Pull out your P&L and look at overhead costs for areas to reduce. Focus on eliminating costs that do not have a direct impact on customer satisfaction or increasing sales.
• Can part of the building process be outsourced to vendors who can produce the item more quickly and efficiently?
• Take pre-paid items like insurance and modify contracts to be small monthly amounts vs. lump sums.
• Review equipment you use to produce product/service. Leasing vs. buying will not tie up as much cash in assets.
• Sell any unused equipment, review obsolete inventory and sell if possible.

DELIVER:

• Ensure shipment accuracy which will cause payment delays or short-payments
• Simplify delivery options (ship full pallets, or for services: deliver final product remotely)
• Change shipping terms to FOB shipping point vs. FOB delivery, to issue bills sooner
• Economize on delivery options, (i.e. train vs. truck, ground vs. air) to reduce costs
• What are order fulfillment rates? Do out-of-stocks delay shipments and payments?

BILL CUSTOMER:

• Increase frequency of billing (e.g. from monthly to weekly)
• Shorten terms: instead of 30 day terms, reduce or make it “payment upon receipt.”
• Offer 2% discount for prompt payment. (This may be far less costly than missed sales opportunities if you don’t have cash.)
• Ensure billing accuracy: correct purchse order, address, and ensure the invoice and documentation comply with customer requirements
• Establish and enforce late-payment penalties.
• Use electronic billing vs. postal mail.

RECEIVE PAYMENT:

• Follow up promptly on overdue invoices
• Use credit cards or Paypal accounts as forms of payment (understanding that fees can be as high a 7% for doing so)
• Consider factoring invoices if all else fails. This can be an expensive alternative but may be necessary to generate cash.