“The three most dreaded words in the English language are ‘negative cash flow’.” -David Tang
The last section in the “Scaling up: How a Few Companies Make it…and the Rest Don’t” by Verne Harnish, detonates typical assumptions about the role of cash in a business. Harnish notes that “Growth sucks cash” and he illustrates a company that was literally “growing broke.”
What was surprising about this section is that Harnish suggests that regular Key Performance Indicators (KPIs) for the financial health of a company are misleading. For example, companies often first tout “Revenue,” which he terms “Revenue Vanity”. Another common KPI is “Profitability”, but Harnish asks “What is more important, profit or cash?” For a growing business, the resolute answer is “Cash.” A huge influx of cash allows the likes of Amazon to thrive, even while breaking even or posting losses.
Companies are usually Profit-focused, but considering only the Revenue minus Expenses will provide a skewed view of the numbers. The saying is “Revenue is vanity, profit is sanity and cash flow is king.” The numbers can be manipulated to show “profit”, but only cash and debt balances are facts. Cash and debt balances, incidentally, are what banks look at to evaluate a company’s performance.
So how do you increase cash flow? Our plan is to implement Harnish’s suggestions:
- Shorten cycle time – How fast does a dollar invested in the business (from finding an opportunity all the way to revenue) come back to the company? This is a KPI Harnish suggests called the “Cash Conversion Cycle.” To this point, Every WhirlWind Techie has a direct impact on our cash flow. When a techie fails to submit his/her timesheet on time, that delays our invoicing and increases our Cash Conversion Cycle. When Project Managers don’t submit their monthly reports on time, that also delays our invoicing.
- Eliminate mistakes – Make sure your hours are entered in the right bucket, invoices are submitted on time in the right format, and within the correct timeframe.
- Change the business model – This entails changing how we charge clients to provide services or products. The simplest recommendation Harnish gives is simply asking clients to pay earlier in the cycle. We have other plans in the works to commoditize our services. Stay tuned to hear more.
Another initiative we want to roll out to all our Techies is Financial Literacy, spanning the personal and business aspects of Finance and empowering everyone in the company to contribute to the cash flow.
Do you have any ideas on increasing our cash flow? What can we start, stop, or continue doing to increase our cash flow? Your voice is important to us!