February 24, 2011
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Clayton Gardiner
When people tell me they want to start a business, I usually offer this advice: “I know you're good at what you do, and I’m sure your product or service will solve real needs in the market. But you need to know that business ownership is about a lot more than that. You’re going to need to become an expert in cash flow.”
Cash flow needs to be one of the major influencing factors in developing the most effective business model in the early stages of any company.
For years, we've been told that there’s really only one constant in business model creation: change. But recently, there has a been a movement away from the word "change," toward another word: "pivot." That word helps us focus on the critical decision points of testing, trying, tweaking, and sometimes overhauling the business model.
The underlying theme of a business model is to find the most scalable and repeatable way to offer your products and services, and many pivots need to happen to maximize the life-blood, or cash flow, of the business. Here are the 10 most common cash-flow pivots I have seen deployed in the ever-pivoting world of business-model creation, design, and implementation.
Pivot 1: Master Marketing
Becoming a master of anything takes time and experience. Marketing is all about pivots, testing, and trying different things until the most effective methods are found. But all too often, marketing chews up vital cash flow before anyone realizes the money is being wasted. If you master marketing, your marketing will generate more cash flow, not just use up the cash you started with.
Pivot 2: Maximize CPA
No, I’m not talking about your tax CPA. I’m talking about cost per acquisition: the amount of money it costs you to acquire a new customer. Pivots that include reducing the CPA will help cash flow and contribute toward growth capital as well.
Pivot 3: Invoice Timing and Terms
Invoice your customers as early as possible. I knew of one company that would charge its customers every month for the work it did the previous month. Through a few calculated pivots, the company began invoicing its customers before it had even started the work -- buying more than 30 days of extra cash flow.
Don’t negotiate the terms. You set the terms, and your customers accept them. And if the customers go late, cut them off. A non-paying customer is more costly than no customer at all.
Want more tips on cash flow? Check these stories out:
Pivot 4: Invoice Frequency
How often do you charge customers? Is it predictable? And does it bring the total amount that the customer pays into a cost range that they perceive as acceptable? Are they motivated to pay for several periods in advance?
Pivot 5: Lean Inventory
Inventory on your shelves is cash not in your bank account. Any pivots that push inventory either up or down your supply chain will help your cash flow.
Pivot 6: Variable Cost Reliance
Fixed costs make it difficult to pivot effectively. Building a business model around variable costs, and pivoting to rely more on them, will help the cash flow of a start-up and growing business.
Pivot 7: Subscription Structure
What is the lifetime value of a customer for your business, and what pivots can you make to enhance it? Business models with recurring, subscription-type pricing will generate the most short- and long-term cash for your business. Almost every business can convert at least some of its products and services to a subscription-pricing model, and banks and investors prefer to give money to steady-cash-flow businesses.
Pivot 8: Recurring Contracts
Pivots that move customers toward contractual obligations to use your products and services for some time will drive the valuation of your business to its highest peak. The steady, predictable cash flow that comes from these contracts is the most attractive type of business to a potential financial or strategic buyer.
Pivot 9: Focus on Customers, not Products
All too often, founders and inventors are infatuated with their product, and not with understanding and solving customers’ real problems. Harvard Business School professor Clay Christensen refers to this understanding as knowing what job your customers hire your product or service do for them. Peter Drucker wrote: “True marketing starts out…with the customer, his demographics, his realities, his needs, his values. It does not ask ‘What do you want to sell?’ It asks, ‘What does the customer want to buy?’” Pivot toward what customers want to buy, and you’ll reach cash flow positive sooner than you may think.
Pivot 10: Payment Options and Convenience
Any pivot in the business model that makes it more convenient, or provides more options for your customers to pay you, will help your cash flow. Your customers should never be given a chance to think about any inconvenience associated with paying you.
As you start and grow your business, look for opportunities to implement these 10 cash-flow-enhancing pivots. You’ll improve your chances for long-term sustainability and become an expert in cash flow.
Check your balance, review recent transactions and pay your bill on the go.
Clayton Gardiner 8 months ago
excellent article a must read for all small and medium size businesses. Cash is really not like oil to an engine...but rather gasoline to a motor vehicle. No matter how much oil you have in the engine, if you run out of cash you are "dead in da water". A cash managment system is vital to small and medium size businesses. Manage your cash and you are half-way there. Ignore these points and sooner rather than later your business will end up as a statistic...another failed business.