A Tale of Cash Flow

A frequently heard complaint among small to medium business owners is “I am making money, but I have no cash.  How can that be?”  Well, it is more likely the norm than the exception.

Years ago I was hired by a company that had revenues of about $130 million.  Margins were healthy, G&A costs were a little excessive (a lot of the owner’s personal expenses were run through the company), but not completely whacko.  But, cash was constant struggle and creditors were always screaming to be paid.

I asked to see a few customer invoices.  I thought maybe the payment instructions were unclear, or maybe they lacked the famous, “Payment due within 30 days”, or maybe there was no reference to the customer’s purchase order.  A lot can go wrong with invoices.

All that good stuff was there.  But one thing leapt out like a cheetah after a wounded gazelle.  An invoice dated October 29 noted that the services performed were provided on August 15.  Hmmm.  I grabbed a bunch more of invoices and two things became apparent.  The first was invoicing only occurred in the last few days of the month, and, on average 76 days elapsed between the provision of service and rendering of invoices.

Then it was time to check how long it took to collect the invoice once it was sent.  Instinct told me that if there is little interest in rendering a bill, there is unlikely to be a sense of excitement in collecting it.  Sure enough, it took, on average, 95 days to collect the invoices that were going out 76 days after the service was provided.  Not quite half a year, but close enough.  I suggested the name of the company be modified by placing “Bank of” in front of its name.

So, what was the fix?  The first priority was to accelerate the billing.  This was done by setting weekly targets.  Every Monday I would send to the five branch managers a bar chart showing each branch’s percentage completion of the target.  Ultimately, this reduced the billing delay to about 5 days (given the industry this was only slightly above the theoretical minimum). 

Then the focus was on cash collections.  We moved the responsibility for that to a collections group, but, clearly, the cooperation of service providers was required from time to time.  We set targets of DSO (Days Sales Outstanding) by customer segment, branch and the company overall, and monitored them on a weekly basis.  Ultimately, we managed to get the DSO to 55 days.

In total, then, we reduced provision of service to cash from 171 days to 60 days.  While this did not allow me to go, Scrooge McDuck like, swimming in a pool full of cash, it did take a lot of pressure off.  So why is there not a statue of me in the lobby of the building?  More on that in the next post.


photo credit: Tom Simpson DuckTales animation cel signed by Carl Barks, 1998 via photopin (license)

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