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Strategy for Managing Cash

managing cash

Does your company have a strategy for managing cash

Many companies have established procedures for purchasing materials, collecting customer payments, and paying vendors.

But often people either do not communicate these procedures or simply don’t follow them consistently.

Even when everyone is aware of and follows the established protocol, your system may be flawed. Before we show an example, you need to know how to manage cash flow

Know How to Manage Cash Flow

We all know that cash is king – liquidity is essential for survival. Many entrepreneurs only know how much is in the bank, but they don’t understand how much cash they actually have. So, how does one manage cash flow?

First, you need tools. 

Here are a few tools that can help a company manage cash flow:



Manage and Work Your Operating Cycle

Then you need to manage and work your operating cycle. Your operating cycle is “how many days it takes to turn purchases of inventory into cash receipts from its eventual sale”. It indicates true liquidity – how quickly you can turn your assets into cash. Calculate how long your operating cycle is using the following formula:

Operating cycle = DIO + DSO – DPO

Watch Your Expenses

Watch your expenses carefully. If you do not have an eye on SG&A and procedures on what can be purchased, then you risk racking up unnecessary overhead. Think about too much inventory, unnecessary equipment replacements, extreme marketing budgets, etc. 

Use Cash Wisely

Use your cash wisely. Always be thinking about will this add value to my company? when spending your valuable cash. If you will not see a return on your investment, then consider spending the cash elsewhere. 

Collect Quicker

Another method to manage (and improve) cash flow is to collect quicker. This is a great method to use if you are in a cash crunch and can only make small improvements. For example, there is a $10 million company that collected their accounts receivable every 365 days. They had a lot of cash tied up. If they improved their DSO 5 days, that would be an extra $137,000 of free cash flow

Example of Strategy for Managing Cash

Let’s look at an example of a strategy for managing cash flow. Imagine that Company A has 120 days of inventory on hand. They collect receivables in 60 days. And they pay payables within 30 days.  Even assuming that this is their established cash management strategy and everyone follows it, Company A will still find itself in a cash crunch. This is because of the disparity of time that cash is tied up in inventory and receivables versus the speed with which it pays its payables.

So what can Company A do to free up cash?  Here’s a link to an article that talks about how to develop a strategy for managing cash and techniques to improve cash flow.


 

Strategy for Managing Cash, How to Manage Cash Flow

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The CFO Guide to Your CEO

Wouldn’t it be great if we had a guide for everything we do? A guide for marriage? A parenting guide? A guide to dealing with difficult times?  Or maybe a CFO guide to understanding your CEO?

cfo guideTypically, Chief Executive Officers (CEOs) come from an operational or sales background. Naturally, Chief Financial Officers (CFO) do not always see eye to eye with their CEO. But over the past 25 years, The Strategic CFO has been working with CFOs to not elevate their status within companies, but also to make them more useful to the CEO… And therefore, more valuable to the entire company.

What The CEO Wants to Know

Just like every person in a company looks at their own focus areas (finance, marketing, operations, etc.), the CEO needs to know specific things and can go without knowing other things. To improve the way the CEO sees and respects the CFO’s role and guidance, it is critical to know what they want, why they want it, and how to communicate with them effectively.

CFO Guide to Your CEO

The first step in our CFO guide is to understand how your CEO thinks.

1. Future, Not Past

The typical CEO is future oriented. What’s the next move? What are the company’s goals for this next quarter? The CEO acts as the visionary for the company – a pilot, a ship captain, a general. They look forward at the horizon, protecting the people behind them as they march forward. Therefore, instead of focusing on past records or past performance, make the future path clearer for the CEO. The future is more important than the past in the CEO’s role. But don’t neglect past performance’s value to the CEO. Past performance can help predict the future. Although the past is the past and nothing can be changed in the past, you can change the future and that’s what your CEO wants to know.

As the financial leader of your company, you may struggle with focusing on the future, as you have been trained for so long to justify and rationalize the past. One thing you should impress in your mind is that your CEO and other executives are laser-focused on the future. Use what you have recorded to display your vision of what lays ahead.

2. Know Your Numbers

One of the top things taught in business school is to know your numbers. What does “know your numbers” mean? Think about your unit economics. Go back to the basics. If your company sells 10,000 widgets at $1 in a month but your company is wanting to increase costs to $11,000, you should be able to immediately indicate that decision would not be wise as you will then be unprofitable.

Everyone in your company, especially the financial leader, needs to know the numbers of the company. Have the facts and data to support every claim, prediction, or forecast. If the CEO is relying on your financial expertise, you better be able to lead them forward financially. Know your numbers and how they impact your company in the short-term or long-term.

cfo guide3. Cash, Cash, Cash

Cash is king. To operate the company successfully, cash is absolutely critical. Whether you are paying down debt, keeping up with growth, or allowing for flexibility, you as the financial leader need to know exactly where you are with cash always.

What happens when you need more cash or when you want to improve cash flow in your company? It’s difficult to know where to start. But you don’t have to guess anymore… Download the 25 Ways to Improve Cash Flow to start increasing the amount of cash in your business today!

4. Impact, Not Progress

You are painting a picture… The CEO doesn’t need to know the type of paint, the kind of paint brush, or the size of the canvas. But they do need to know the big picture and how it’s going to look after it’s finished. They don’t have enough time in the day to know all the details about progress; however, they do want the big picture updates on the impact of what is happening.

Remember, progress is still important. The managerial level needs to know the progress of projects. When you meet your CEO, have the project’s progress in the back of your mind in the case the CEO wants to know anything more specific.

Try to summarize all outcomes and updates on milestones concisely. Their high-level thinking does not need to be clouded by minute details and the nitty gritty of day-to-day operations. Sometimes details are necessary for the CEO to know when deciding the future of the company; so in that case, don’t hesitate to expand on the details.

What does impact mean?

Impact is defined as the “measure of the tangible and intangible effects (consequences) of one thing’s or entity’s action or influence upon another” (Business Dictionary). Think about it this way… Whether you are the CEO, COO, CFO, Controller, manager, community leader, a parent etc., you are responsible for people. Your worry should not be focused on the past but on how your decisions will impact people in the future. The CEO is responsible for everyone underneath him or her so a decision that will change the future for their employees, partners, stockholders, family, etc. is a big deal. Adjust your mindset from past performance to future impact.

5. Understand the Big Picture

Unfortunately, your CEO does not have all day to listen to you. The quicker you understand why your CEO acts the way they do and what they need to run the company successfully, the better you will be able to perform in your role as a financial leader. Align your goals/decisions/recommendations with the visions and priorities of the company.

For example, cash is tight but you want to get a software program that will report more timely and accurately the things you need to do your job. If you approached the conversation by trying to convince the decision maker (i.e. CEO) by sharing all the features, you will most likely get a “no”. But if you understand the big picture, communicate how this investment will serve you better long term versus the current software. Hint: Show some numbers of how this solution will improve cash flow, profitability, productivity, time, and money.

Conclusion

You should be your CEO’s partner, wingman, guide, confidant. Know what your CEO wants, thinks, and needs. To get started on improving your relationship with your CEO and to improve cash flow, download the 25 Ways To Improve Cash Flow whitepaper for free. Find other ways to improve your cash flow within 24 hours.

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Why do most startups fail?

why most startups fail

Right now is the time of innovation – kickstarters and new types of marketing campaigns are popping up everywhere. You might have an idea yourself, regardless of whether you’re a Millennial, Generation X, or even a Baby Boomer! So how do you know if your idea is a good one?

As I have mentioned in previous posts, I am an adjunct professor at the University of Houston Wolff Center for Entrepreneurship. In one of our first classes, we discussed an interesting topic: the survival rate of a new business, and why most startups fail.

According to Fortune, 9 out of 10 new businesses fail. The number one reason for why most startups fail was not having a product that serves the market. I asked the students this question, and now I’ll ask you… Do you think a good product is enough to survive in the market?

Top 5 Reasons Why Most Startups Fail

The answer to that question is no. A number of factors play into why most startups fail. Here are a few:

#1: People don’t need it!

The number one reason for the failure of a business is creating a product for a market that doesn’t need it. The first thing you should do, before you spend all of your cash on producing and prototyping your product, is market research. Who is your customer? How many customers are out there? How much are they spending on a product that serves a similar function? If you can’t answer all of these questions about your idea immediately, then maybe this isn’t the best business to invest in.

 #2: Cash wasn’t King

Where are you spending your money? Research shows that 29% unfunded startups fail because they ran out of money. We can assume that they spent the money on research and development, marketing, salaries, and other overhead expenses. How did they run out of cash in the first place? Because the financial leaders overlooked important, and possibly tedious details.

Also consider that different businesses see profits at different times. You may go 5 years without seeing a dime. Or maybe it’s the other way around –  some startups might skyrocket after a couple of years. But do they have enough cash to keep them afloat? Looking ahead is always important when you manage your finances. Like gas in a jet, cash is the fuel to keep your business running. Cash is king.

Even if you aren’t starting a new business, taking a look at your company as a whole is always a good idea when making big decisions. Download our free Internal Analysis whitepaper to learn how!

#3: Lack of a Quality Team

why most startups failObviously when you start a company, you want the best staff you can build. However, most startups can’t afford “the best of the best.” There may be certain skills that you need, tasks that need to be done quickly, but your staff simply cannot keep up.

Let’s say your team has all the skills you need, but they don’t communicate or work well with others. You’ve just invested your money in a team that could fall apart. It’s better to a have a team that learns the skills and has a positive attitude, versus a skillful team with a negative attitude. In this case, quality is defined by the talent in the person, not just the skills they bring.

#4: No Competitive Advantage

On top of marketing research, you also have to conduct competitive research when you start a business. What makes your company unique? In a way, a condensed competitive scope may indicate that your product is needed. What you have to figure out is how to make your brand more attractive than your competitor’s.

This means more than just “being the cheaper alternative.” The intellectual property itself has to have that secret sauce… which also means that you answer your customer’s problem better than your competition.

#5: Poor Pricing

Poor pricing is another reason why most startups fail, so don’t underestimate the power of smart pricing.

The Startup Roadmap

Solve a Problem > Build a Good Team > Research/Develop the Idea >

Financial Projections > Look for Funding > Develop Product >

Disrupt a market.

This is a general roadmap of a startup. Typically, it takes 3 years to be successful in an industry. Think about it – when you apply for a job, they look for people with 3+ years experience. Why? Because they have 3+ years experience in a skill set. The interviewee knows how to navigate a problem and has practiced solving it. Same goes for a business.

Why Banks Turn Startups Away

The research pwhy most startups failreviously mentioned shows data for companies that have been around 3-5 years. I like to think that after you pass the first three years, things get easier for your company. For example, banks need to see at least 3 years of financial statements. You may not need profits for all three years, but you should be trending upward by year three for banks to consider investing in your business.

Banks turn away companies less than three years old for multiple reasons. One is that new or small businesses are more risky than larger businesses. Post-recession, banks have to be more strict with who they lend to. Banks also earn less profit on smaller loans. If you think about it, banks underwrite a $5 million loan for the same cost of underwriting a $50,000 loan. It makes more sense to focus on the larger loans, with a less risky business.

Conclusion

Although it seems like everyone around you is looking for that next big idea, really think through your next venture. Do you have a market, cash, and a good team? What is your competition like? And finally, what is your pricing strategy? If you create a roadmap and make financially sound decisions, your startup should already look better than most.

Speaking of making financially sound decisions, check out our free Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

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Improving Profitability – Fuel for Growth

How do you focus on improving profitability instead of just boosting sales? 2016 wasn’t the best year for some of us, but the new year provides a perfect opportunity to reassess goals. An entrepreneur’s natural tendency is to increase sales in order to balance out last year’s financials. But what many entrepreneurs fail to consider is are those sales actually profitable?

There’s Only So Much Cash

Why is improving profitability instead of simply increasing sales so important? Because, believe it or not, you can actually grow yourself into bankruptcy.

Huh?

Many are quick to say that more sales is the solution – however, there are a lot of factors you have to consider before you start selling everything. One of the most important metrics you must know is your cash conversion cycle. The cash conversion cycle is the length of time it takes a company to convert resource inputs into cash flows.

Cash Conversion Cycle Formula:

Cash Conversion Cycle (CCC) =Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) – Days Payable Outstanding (DPO)

– or –

CCC = DSO + DIO – DPO

improving profitability instead of salesDaily Sales Outstanding (DSO): This metric measures the number of days it takes to convert your receivables into cash. Ideally, the faster you can collect, the faster you can use the cash to fuel growth.

Days Inventory Outstanding (DIO): This is an indicator of how quickly you can turn your inventory into cash. Reducing DIO is good. If all of your cash is tied up in inventory that isn’t moving, then you might have a problem.

Days Payable Outstanding (DPO): This measures how quickly you are paying your vendors. If you are consistently paying your vendors more quickly than you are getting paid by your customers, then you risk running out of cash. If your vendors aren’t giving you a discount for paying early, then why are you paying early? If you have 30 days to pay, then why pay on the second day? Use that cash for the other 28 days you have for other vendors who offer you discounts or to fuel growth.

Managing the cash conversion cycle is a key way you can enable your company to grow.  And we all know how fond entrepreneurs are of growth…

(Click here to learn How to be a Wingman and be the trusted advisor to your team.)

Cash is like Jet Fuel

Often, entrepreneurs (especially those from a sales background) focus on improving sales. What many fail to realize is you can actually sell yourself into bankruptcy.

Let’s compare a business to a jet. If a jet is moving at a constant pace, then the fuel used to power the jet runs out at a constant pace. From a business perspective, if the sales in a company are constant, then the cash and assets required to fuel the company is also constant and predictable.
improving profitability instead of salesHowever, if a company decides to increase sales, then this requires more “fuel” or cash.

But if an entrepreneur decides to increase sales to a greater degree than cash flow, almost vertically, then the business may run out of fuel (cash) and can ultimately crash and burn.
improving profitability instead of sales

The quicker you grow, the quicker you burn cash.

improving profitability instead of sales

Sustainability is Key

The sustainable growth rate of a company is a measure of how much a company can grow based upon its current return on assets. The sustainable growth rate of a company is like the wind turbine of a jet. Naturally, the wind turbine gives the jet a 5-10% incline. But what if you want to grow to 25%? Or 50%?

To grow faster than your return on assets, you’ll need to take on additional debt or seek equity financing. Either you pay for it, or someone else does. To avoid increasing debt or giving up control, it’s important to maximize your current asset velocity (think managing CCC) and make sure your sales are profitable.

(Be more than overhead. Be the wingman to your CEO by increasing cash flow!)

How to Grow Your Business

If you want to grow your business, there are a couple of things you can do:

(1) Increase your profitable sales. This means deciding which projects have the lowest risk, but highest reward for your business. Time is money, so which customers are worth your time? In exploring this, you might have to conduct some market research for your target market.

For example, if you have some customers who are slow to pay, they’re straining your liquidity. Although it may be difficult, you might have to fire some customers and focus your resources on customers that aren’t such a drain.

(2) Increase capital. Capital is the funding you need to grow the business. Capital can be an investment from an outsider, or it can be cash generated internally by increasing cash flows and maximizing profitability.

Internally: A company can increase cash flow by managing the cash conversion cycle. Collect your receivables faster and manage inventory levels and payables. It is a good idea for a company to grow as organically as possible, meaning growing cash internally.

Externally: If you’ve tightened up your CCC as much as possible, it might be necessary to look for outside sources of cash. However, having external sources of cash is a trade-off; you’ll have debt with a bank, and you might have to give up part of your company to investors (depending on the terms).

Conclusion

So when your business owner says, “let’s increase sales!”, remember focus on making profitable sales. Look at improving the Cash Conversion Cycle to make the most of your internal resources.  Consider outside financing when/if your existing return on assets won’t get you where you want to be.

Don’t crash and burn – make sure your company has the fuel it needs. Your business owner is looking to you to help them grow their business. To learn how to do it, access the free How to be a Wingman whitepaper here.

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Unlock Cash in Your Business

unlock cash in your business

Unlocking cash in your business can make a major impact on valuation, cash flow, profitability, and so much more.  As the saying goes, “Cash is King.” However, there is often money lying around that is essentially “locked up” in the system.

Unlocking Liquidity

Liquidity is key to success. A company could sell all the widgets in the world and have a great net earnings, but still go out of business if it can’t collect paymentsFailure to meet this simple obligation has landed many companies in a cash crunch with Mr. Chapter 11 lurking.

Liquidity =  ability to convert assets to cash

Why is liquidity important? Liquidity is vital to a company. It’s like the blood that runs through your veins. If your blood forms clots within arteries and veins, then you could suffer a heart attack.  Just like the blood coursing through our bodies, freely flowing cash is vital to a healthy company.

unlock cash in your businessReducing DSO

A little improvement goes a long way when unlocking cash in your business.  First things first… Take a look at your DSO, or daily sales outstanding. What is it running?

Oftentimes with our clients, we start by reducing DSO 1-2 days. Depending on the size of the company, this one change could easily create a great deal of free cashFor example, we consulted with a $10 million company that collected every 365 days. If we freed up just 5 days through DSO optimization strategies, it would result in almost $137,000 of free cash!

Small improvements can free up substantial cash within your business.

Here’s an example of how a little goes a long way.  A few years ago, we changed our processes to invoice within 24 hours. This reduced our DSO by 10 days.  Simple things like setting up rules and procedures for invoicing put you in a position to better manage liquidity.

(For more tips on how to optimize your accounts receivable, download your free checklist here.)

What to do in a Cash Crunch

Cash crunches can either be foreseeable or can completely blindside you. Economic downturns, vendors filing for Chapter 11, or a natural disaster, such as a wildfire, can have detrimental impacts on your cash position unless you have the knowledge and skills to cope with cash crunches.

Over several years, I’ve noticed that many companies who find themselves in a cash crunch are investing heavily in technology. While that may not be a bad thing, companies may become over-reliant on the new system and forget that it’s still important to monitor and manage internal processes – namely DSO.

If this is you, there are some options that you can act on to improve DSO:

Slow-moving accounts receivable can hurt a company by tying up cash.  These assets aren’t easy to liquidate in a cash crunch, especially if the crunch is caused by factors that are affecting your customers as well.  It’s important to manage your receivables process to make sure customers are current so the cash keeps coming in.

Example: Sitting on a Desk

CPA firms, law firms, and other professional services are notorious for insisting that all partners review each invoice before they are sent out to the client. The invoices (aka, cash) are essentially sitting on a desk, waiting to be approved. Sometimes, they get lost in the paperwork and are finally sent out 60 days after the service has been completed. Assuming the customer pays within 30 days, the receivable is 90 days old before the cash is in the door.

Let’s look at 2 issues:

#1 Partners are busy.

They simply don’t have time. They should be focused on doing the work, not reviewing invoices. Develop a procedure or invest in systems that circumvent this step.

#2 Each partner has to review the bill.

By having a number of busy partners reviewing invoices, there’s a high chance that it will a) get lost, b) get changed in error or misunderstood, c) get sent out late.

There’s something that most of these firms do not understand: the tradeoff between having a perfect invoice and getting cash quickly.

One firm that I consulted with was in the habit of mailing their invoices 30-60 days after the service was completed. There was no goal on when to mail invoices.  We helped them transition into a position where they mailed invoices within 24 hours of delivering the service. Their DSO was 42, which wasn’t terribly bad.

Then we convinced them to email clients their invoices the day of, reducing their DSO to 38. This was no simple feat. We had to figure out who needed the invoices for processing and we had to train their customers that emailing invoices the day of was the new norm. These are two important factors that you have to acknowledge as you undertake this technological change.  Don’t overlook something as simple as who is receiving the invoiceBusiness owners will likely let your invoice sit in their inbox whereas A/P clerks will make sure it gets put into the accounting system.  While these changes took a little time to adjust to, they saw significant improvement in their cash flow.

Don’t be afraid to ditch old practices.

Value Creation

Are you looking to sell your company in the near future? By reducing your DSO and optimizing your accounts receivable, you’ll be in a better position to add value to your company.

The purpose of business valuation is to assess the capacity a company has to grow. Use this when a company is trying to sell or merge with another firm.

Where To Create Value

It all begins with your revenue growth and profitability. These two metrics can be impacted by cash tied up in accounts receivable. By reducing DSO a certain number of days (depending on what your DSO is currently), you’ll be able to prove to any buyer that your company is able to generate free cash flow.

For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

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How long can a company lose money without running out of cash?

Only when the tide goes out do you discover who’s been swimming naked.
– Warren Buffet

Is the Houston economy’s metaphorical “tide” going out?  It’s hard to say, but some businesses are definitely feeling a bit “naked” these days.  They may not even realize the peril they’re in because they still have positive cash flow despite the fact they’re losing money.  This begs the question…

How long can a company lose money without running out of cash?

The simple answer to the question “how long can a company lose money without running out of cash?” can be found by using this equation:

Liquidity / Burn Rate = Timeline

… where Liquidity = the amount working capital of the company that can be converted into cash

… and Burn Rate = the amount of cash spent each month

This formula can be very helpful in projecting how much time you have to find a solution to turn things around.

Let’s assume you have $1,000,000 in working capital and are losing $100,000 a month.  According to the formula, you will only have 10 months before you run out of cash. The trouble is, you’ve predicted the downturn to last up to 18 months. 

Now what?

Managing “Crisis”

How long can a company lose money without running out of cashThe character for the word crisis in Chinese is actually comprised of two other characters  – danger and opportunity The key to surviving, even thriving, during times of crisis is to find the opportunity amidst the danger.

Your first answer to the crisis was probably to cut costs.  Most likely, you’ve already done as much of that as you can so let’s look at some other ways to weather the storm.

Improving Productivity

One way to stretch your working capital is by improving productivityProductivity can be defined as:

Productivity = Throughput/Resource

 Examples of throughputs are hours worked, widgets produced, etc.  Resources are people, materials, etc.

 In order to improve productivity you must:

  1. Understand the processes – How do we do things around here?
  2. Identify and measure drivers – What’s really driving results?
  3. Identify bottlenecks & inefficiencies – What’s going wrong?
  4. Simplify the process – What can we cut out?
  5. Communicate to everyone – Everyone needs to be on the same page.
  6. Tie rewards to results – What gets rewarded gets repeated.

Improving Cash Flow

If you’re worried that you’ll run out of cash before things turn around, it’s time to focus on reducing your cash conversion cycle

Cash conversion cycle = DSO + DIODPO

Where:

DSO = Days Sales Outstanding

DIO = Days Inventory Outstanding

DPO = Days Payables Outstanding

Some of the ways to reduce your Cash Conversion Cycle are:

Lastly, you must measure cash flow on a daily, weekly, quarterly and annual basis.

You can’t manage your cash flow if you don’t measure it!

Want a step-by-step guide to improve your cash flow?  Download our free tip sheet 25 Ways to Improve Cash Flow.

In order to measure cash flow effectively, you’ll need to take a look at your cash flow statement. On the cash flow statement, you’ll see three different type of cash flows:

Operating

Your operating cash flows focus on the measurement of cash generated by your operations.  This is the most important cash flow type to look at when experiencing a positive cash flow and a negative net income. Because a positive cash flow is able to maintain current operations and potentially grow the operations, operating cash flow could be the main determinant in why you’re running out of cash in a positive cash flow period. If you’re experiencing this, you either are hiring personnel and can’t avoid it, OR you’re experiencing collections problems and/or have poor debt structure.

The bottom line of your operating cash flow determines whether your company will make a profit or not.

Investing & Financing

This type of cash flow deals with the cash flowing between the firm and its owners. For example, any technology investments or meeting requirements (payroll, etc.) would be considered investment cash flow. This type cannot be controlled like the operating cash flow due to the investment of necessary items.

If you’re experiencing this in your investing cash flows, look at your assets to determine if each asset is absolutely needed. The solution to an investing cash flow problem would be to sell some of these assets. In addition, consider raising capital to get over the hump.

In the end, you need to be mindful of where your working capital is going. Managing your cash flow is just as important as growing your revenue streams. To learn more ways to improve your cash flow, click here to download our free guide.

For more tips on how to manage your cash flow, click here.

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5 Ways to Prepare for Seasonality

four seasonsSeasonality can be brutal.  If your business is like ours, summertime is pretty slow.  The phones don’t ring, employees and clients are on vacation, nobody is available for appointments and not much happens in general.  Even if summertime is busy in your industry, chances are that there are other times during the year that business slows down noticeably.

5 Ways to Prepare for Seasonality

While a slower pace may sound like a dream if you’re coming off of a busy season, a slowdown can cause issues if not anticipated and planned for.  Employees out of the office can impact productivityCustomers unavailable for appointments and silent phones can mean fewer sales.   All of these factors can have a negative impact on profitability and cash flow.  Here are some steps you can take to prepare for these slow times and minimize their impact.

Consider Temporary Staffing

Some businesses do 75% of their work during 25% of the year.  This definitely makes resource management challenging.  Even if your company isn’t in an extreme situation such as this, utilizing temporary staffing can help smooth out seasonal bumps in productivity.  With staffing firms cropping up in more and more industries, the availability of temporary workers is on the rise.  While the short-term cost of these employees may be more than an in-house worker, the flexibility they provide is attractive to companies that aren’t able to carry the burden of excess staff during slow times.

Build Up Your Backlog

What happens to your sales pipeline shortly before quarterly sales bonuses get paid out?  Chances are, you see a sudden spike in closed sales.  What this seems to demonstrate is that our salespeople have some measure of control over the efforts to close their sales.  With this in mind, there are a couple of approaches you can take to ensure that there are enough sales to get you through the slow times.

First, try sitting down with your sales force with a calendar and map out your seasonality.  Awareness of the seasonal dips may be enough incentive to encourage them to build up their backlog prior to these dips.   Assuming that your sales staff will only be motivated by sales commissions, an alternative solution would be to set your bonus payout dates immediately prior to your slow times.

Keep an Eye on Your Inventory Levels

If your vendors experience the same seasonality as you do, they may not have the manpower to keep up with customer orders in a timely manner during their slow periods.  Hitting them with a last-minute rush order may not work out well and going to another vendor will likely yield the same results.  To avoid running out of key materials, make sure that items needed for planned production are ordered well enough in advance to allow for any seasonal slowdowns.

Get a Handle on Cash

During slow times, a business is likely to consume more resources than it produces.  To ensure that your business has enough liquidity to keep things running smoothly during seasonal dips, it’s important to manage cash carefully.  Here are a couple of cash management tips below. For more ideas, check out our free checklist, “25 Ways to Improve Cash Flow.”

Collect Receivables

If you and your customers are on the same sales cycle, chances are that they’ll be short-staffed at the same times you are.  Payment of payables won’t be high on the list when departments are running on a skeleton crew, so make sure that you’re current on collections before things slow down.

Prepare a Cash Flow Forecast

One of the most important steps you can take in managing cash is to prepare a cash flow forecast.  The forecast will tell you when cash will be tight. Then you can work with your banker to ensure that your company has the liquidity it needs.  On that note…

Keep Your Banker in the Loop

Chances are, you are not your banker’s only client.  They likely have many clients across several industries, so they don’t always know when business is slow for your company.  Rather than waiting for your banker to ask you why this quarter’s results don’t look as good as last quarter’s, reach out to them. Do this especially before business slows down to let them know what your projections look like.  While it may seem counter-intuitive to give your banker potentially bad news, your candor will give them confidence in you and make it more likely that they will work with you if you need it.  Besides, you’ve projected that things are going to improve, right?

Regardless of when your slow times fall, taking steps to prepare for seasonal dips can help minimize their impact on cash flow and profitability.  Now is the time to start to identify and address seasonal fluctuations.  After all, the holidays are just around the corner…

prepare for seasonality

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